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Capital budgeting with an efficient yield-based method: the real rate of return technique

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  • Olivier ROUSSE

Abstract

We develop a yield-based capital budgeting method that solves the inconsistencies of the internal rate of return (IRR) and its alternatives with the shareholders' wealth maximization objective. We thus provide an efficient technique for managers who exhibit in practice a large preference for comparing the merits of projects with rates of return. This new method, called the real rate of return (RRR), is an improvement of the modified internal rate of return (MIRR) based on the Fisher equation. Simple and fitting with managers' needs and way of thinking, the RRR has all the qualities to be accepted in practice.

Suggested Citation

  • Olivier ROUSSE, 2008. "Capital budgeting with an efficient yield-based method: the real rate of return technique," Cahiers du CREDEN (CREDEN Working Papers) 08.02.73, CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1.
  • Handle: RePEc:mop:credwp:08.02.73
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    File URL: http://www.creden.univ-montp1.fr/downloads/cahiers/CC-08-02-73.pdf
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    Cited by:

    1. Olivier Rousse, 2008. "On the bias of yield-based capital budgeting methods," Economics Bulletin, AccessEcon, vol. 7(9), pages 1-8.

    More about this item

    Keywords

    Capital budgeting; modified internal rate of return; net present value; profitability index; Fisher equation.;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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