Capital rationing: The general case and a better criterion for ranking |
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Authors: | Hoi T Wong |
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Institution: | (1) Department of Business Administration, Sul Ross State University, 78801 Uvalde, Texas |
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Abstract: | The definition of net present value implies that the reinvestment rate of return on the intermediate cash flows is equal to
the risk-adjusted discount rate of the project. However, in many situations, the two rates are different. Therefore, in capital
rationing, the ranking of projects based on net present value is incorrect in those situations. Another problem is that financial
managers would prefer to use internal rate of return for ranking, although ranking by net present value is theoretically superior.
This paper solves both problems by developing a new ranking criterion. |
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Keywords: | |
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