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Ranking Investment Projects

  • Foster, James E.

    (Vanderbilt U)

  • Mitra, Tapan

    (Cornell U)

This paper describes conditions under which one investment project dominates a second project in terms of net present value, irrespective of the choice of the discount rate. The resulting partial ordering of projects has certain similarities to stochastic dominance. However, the structure of the net present value function leads to characterizations that are quite specific to this context. Our theorems use Bernstein's (1915) innovative results on the representation and approximation of polynomials, as well as other general results from the theory of equations, to characterize the partial ordering. We also show how the ranking is altered when the range of discount rates is limited or the rate varies period by period.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 01-06.

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Date of creation: Apr 2001
Date of revision:
Handle: RePEc:ecl:corcae:01-06
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  1. Steinar Ekern., 1980. "Time Dominance Efficiency Analysis," Research Program in Finance Working Papers 105, University of California at Berkeley.
  2. Pratt, John W & Hammond, John S, III, 1979. "Evaluating and Comparing Projects: Simple Detection of False Alarms," Journal of Finance, American Finance Association, vol. 34(5), pages 1231-42, December.
  3. Sen, Amartya, 1997. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198292975.
  4. Sen, Amartya, 1975. "Minimal conditions for monotonicity of capital value," Journal of Economic Theory, Elsevier, vol. 11(3), pages 340-355, December.
  5. J. Hirshleifer, 1958. "On the Theory of Optimal Investment Decision," Journal of Political Economy, University of Chicago Press, vol. 66, pages 329.
  6. Bohren, Oyvind & Hansen, Terje, 1980. " Capital Budgeting with Unspecified Discount Rates," Scandinavian Journal of Economics, Wiley Blackwell, vol. 82(1), pages 45-58.
  7. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
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