Ranking and Selection Methods for Capital Investment Decisions in Private and Public Sectors.

by K. V. Smith

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There are six methods for selecting among alternative capital investments: payback reciprocal (speed of recovering the outlay), average rate of return, and four kinds of discounted-cash-flow analysis. The time value of money should be discounted for, but no single method is best in all cases. When benefit/cost ratio (BCR), which measures capital efficiency, conflicts with net present value (NPV), which maximizes total wealth, the author prefers NPV. However, BCR must often be used for government investments in which benefits are not "dollarizable." Sets of partially related projects can be analyzed by an integer programming procedure. Discounting for uncertainty tends to confuse risk with interest rates; a certainty equivalent penalty is preferable. 46 pp. Ref.

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