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Cost-Benefit Analysis for Investment Decisions: Chapter 4 (Discounting and Alternative Investment Criteria)

Author

Listed:
  • Glenn Jenkins

    (Queen's University, Canada and Eastern Mediterranean University, Cyprus)

  • Chun-Yan Kuo

    (Queen's University, Canada)

  • Arnold C. Harberger

    (University of California, Los Angeles, USA)

Abstract

This chapter discusses the alternative investment criteria commonly used in the appraisal of investment projects. The net present value (NPV) of a project criterion is widely accepted by accountants, financial analysts, and economists as the one that yields the correct project choices in all circumstances. However, some decision makers have frequently relied upon other criteria such as the internal rate of return, the benefit-cost ratio, the pay-back period and the debt service capacity ratio. The strengths and weaknesses of these criteria are examined in this chapter in order to demonstrate why the NPV criterion is the most reliable.

Suggested Citation

  • Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 4 (Discounting and Alternative Investment Criteria)," Development Discussion Papers 2011-04, JDI Executive Programs.
  • Handle: RePEc:qed:dpaper:197
    as

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    File URL: http://www.queensjdiexec.org/publications/qed_dp_197.pdf
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    References listed on IDEAS

    as
    1. Garber, Alan M. & Phelps, Charles E., 1997. "Economic foundations of cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 1-31, February.
    2. Yescombe, E. R. & Yescombe, E. R., 2002. "Principles of Project Finance," Elsevier Monographs, Elsevier, edition 1, number 9780127708515.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. 250 – Ranking environmental projects 16: Other cost issues
      by David Pannell in Pannell Discussions on 2013-08-12 20:00:52

    More about this item

    Keywords

    Investment Appraisal; Discount Rate; Project Appraisal;

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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