IDEAS home Printed from https://ideas.repec.org/p/col/000463/010993.html
   My bibliography  Save this paper

Aggregate Return on Investment for Investments under Uncertainty

Author

Listed:
  • Carlo Alberto Magni

    ()

Abstract

This paper deals with with capital budgeting decisions under uncertainty. We present an Aggregate Return On Investment (AROI), obtained as the ratio of total (undiscounted) cash flow to total invested capital and show that it is a genuine rate of return which, compared with the risk-adjusted cost of capital, correctly signals wealth creation. The AROI exists and is unique and, for two mutually exclusive projects, we derive an incremental AROI and an incremental risk-adjusted cost of capital, by means of which two unequal-risk projects can be correctly compared. Iterating the incremental procedure, we show that the AROI approach correctly ranks any bundle of different-risk competing projects.

Suggested Citation

  • Carlo Alberto Magni, 2014. "Aggregate Return on Investment for Investments under Uncertainty," PROYECCIONES FINANCIERAS Y VALORACION 010993, MASTER CONSULTORES.
  • Handle: RePEc:col:000463:010993
    as

    Download full text from publisher

    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2335148
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Austin J. Jaffe, 1977. "Is There A "New" Internal Rate of Return Literature?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 5(4), pages 482-502.
    2. van der Laan, Erwin, 2003. "An NPV and AC analysis of a stochastic inventory system with joint manufacturing and remanufacturing," International Journal of Production Economics, Elsevier, vol. 81(1), pages 317-331, January.
    3. Sandahl, Gert & Sjogren, Stefan, 2003. "Capital budgeting methods among Sweden's largest groups of companies. The state of the art and a comparison with earlier studies," International Journal of Production Economics, Elsevier, vol. 84(1), pages 51-69, April.
    4. Carlo Alberto Magni, 2010. "Average internal rate of return and investment decisions: A new perspective," PROYECCIONES FINANCIERAS Y VALORACION 006653, MASTER CONSULTORES.
    5. Gallo, Paolo & Peccati, Lorenzo, 1993. "The appraisal of industrial investments: A new method and a case study," International Journal of Production Economics, Elsevier, vol. 30(1), pages 465-476, July.
    6. Slagmulder, Regine & Bruggeman, Werner & van Wassenhove, Luk, 1995. "An empirical study of capital budgeting practices for strategic investments in CIM technologies," International Journal of Production Economics, Elsevier, vol. 40(2-3), pages 121-152, August.
    7. Lefley, Frank, 1996. "The payback method of investment appraisal: A review and synthesis," International Journal of Production Economics, Elsevier, vol. 44(3), pages 207-224, July.
    8. Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "An Analysis of Criteria for Investment and Financing Decisions Under Certainty," Management Science, INFORMS, vol. 12(3), pages 151-179, November.
    9. Borgonovo, E. & Peccati, L., 2006. "The importance of assumptions in investment evaluation," International Journal of Production Economics, Elsevier, vol. 101(2), pages 298-311, June.
    10. Naim, M.M., 2006. "The impact of the net present value on the assessment of the dynamic performance of e-commerce enabled supply chains," International Journal of Production Economics, Elsevier, vol. 104(2), pages 382-393, December.
    11. Remer, Donald S. & Stokdyk, Scott B. & Van Driel, Mike, 1993. "Survey of project evaluation techniques currently used in industry," International Journal of Production Economics, Elsevier, vol. 32(1), pages 103-115, August.
    12. Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "Mathematical Analysis of Rates of Return Under Certainty," Management Science, INFORMS, vol. 11(3), pages 395-403, January.
    13. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    14. Lindblom, Ted & Sjögren, Stefan, 2009. "Increasing goal congruence in project evaluation by introducing a strict market depreciation schedule," International Journal of Production Economics, Elsevier, vol. 121(2), pages 519-532, October.
    15. Carlo Alberto Magni, 2010. "Average internal rate of return and investment decisions: A new perspective," PROYECCIONES FINANCIERAS Y VALORACION 006653, MASTER CONSULTORES.
    16. Borgonovo, E. & Peccati, L., 2004. "Sensitivity analysis in investment project evaluation," International Journal of Production Economics, Elsevier, vol. 90(1), pages 17-25, July.
    17. Remer, Donald S. & Nieto, Armando P., 1995. "A compendium and comparison of 25 project evaluation techniques. Part 2: Ratio, payback, and accounting methods," International Journal of Production Economics, Elsevier, vol. 42(2), pages 101-129, December.
    18. Giri, B. C. & Dohi, T., 2004. "Optimal lot sizing for an unreliable production system based on net present value approach," International Journal of Production Economics, Elsevier, vol. 92(2), pages 157-167, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cuthbert, James R. & Magni, Carlo Alberto, 2016. "Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR," International Journal of Production Economics, Elsevier, vol. 179(C), pages 130-140.
    2. Magni, Carlo Alberto, 2016. "Capital depreciation and the underdetermination of rate of return: A unifying perspective," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 54-79.
    3. Wilson, William W. & McKee, Greg & Nganje, William & Dahl, Bruce & Bangsund, Dean, 2017. "Economic Impact of USWBSI’s Scab Initiative to Reduce FHB," Agribusiness & Applied Economics Report 264672, North Dakota State University, Department of Agribusiness and Applied Economics.

    More about this item

    Keywords

    Return On Investment; ranking; uncertainty; net present value; rate;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000463:010993. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ignacio Velez). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.