Journal of Korean Society of Industrial and Systems Engineering (산업경영시스템학회지)

Society of Korea Industrial and System Engineering (한국산업경영시스템학회)
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Economic Evaluation Method Based on Rate of Return for Multiple Investment Alternatives

다수의 투자대안들에 대한 수익률 기준의 경제성 평가방법

  • Kim, Jin Wook (School of Industrial Systems and Naval Architecture Engineering, Changwon Nat'l University)
  • 김진욱 (창원대학교 산업조선해양공학부)
  • Received : 2019.01.25
  • Accepted : 2019.02.28
  • Published : 2019.03.31
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Abstract

There are two methods for evaluating two or more mutually exclusive projects. One is a total investment approach and the other is an incremental investment approach. The former can rank projects by the criterion of the net present value, but the latter can't do it. An incremental investment approach is only possible when all pairwise alternatives are compared. Thus an incremental investment approach is superior in ranking them over an incremental investment approach. To do so, a principle of comparison must be established. Comparisons of profitability are reasonable when operating the same amount of investment over the same period of time. One principle is that all projects are invested in the largest of the projects. Another principle is that all projects are invested during the longest project life of the projects. In this paper, even if the principle is followed, it will be shown that the external rate of return fails to rank them. However, the productive rate of return criterion would prove to be able to rank them like the net present value standard, provided that the principle of comparison is kept. In addition, rate of returns can be assessed so that all mutually exclusive projects can be compared at once, such as on the criterion of the net present value. That is, it can be also compared with many other returns, such as the profit rates on financial investments or real investments.

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Acknowledgement

Supported by : Changwon National University

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