Browse > Article
http://dx.doi.org/10.11627/jkise.2019.42.1.137

Economic Evaluation Method Based on Rate of Return for Multiple Investment Alternatives  

Kim, Jin Wook (School of Industrial Systems and Naval Architecture Engineering, Changwon Nat'l University)
Publication Information
Journal of Korean Society of Industrial and Systems Engineering / v.42, no.1, 2019 , pp. 137-142 More about this Journal
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.
Keywords
Mutually Exclusive Projects; Total Investment Approach; Incremental Investment Approach; Discounted Cash Flows; Net Present Value; Average Rate of Return; Modified Rate of Return;
Citations & Related Records
Times Cited By KSCI : 2  (Citation Analysis)
연도 인용수 순위
1 Fleischer, G.A., Introduction to Engineering Economy, PWS publishing Company, Boston, 1994, pp. 84-89.
2 Kim, J.W. and Lee, C.S., A Study on Rate of Returns in Engineering Projects, Journal of Society of Korea Industrial and Systems Engineering, 2008, Vol. 31, No. 3, pp. 74-79.
3 Kim, J.W., Cha, D.S., and Park, C.T., Ranking Mutally Exclusive Alternatives, Journal of Society of Korea Industrial and Systems Engineering, 2005, Vol. 28, No. 1, pp. 134-139.
4 Kim, J.W., Kim, K.-W., and Kim, S.G., A Study on the Calculation of Productive Rate of Return, Journal of Society of Korea Industrial and Systems Engineering, 2015, Vol. 38, No. 3, pp. 95-99.   DOI
5 Park, C.S. and Sharp-Bette, G.P., Advanced Engineering Economics, John Wiley and Sons, Singapore, 1990, pp. 222-228.
6 Park, C.S., Contemporary Engineering Economics, 2nd ed., Addison-Wesley, CA, 1997, pp. 209-223.
7 Steiner, H.M., Engineering Economic Principles, 2nd ed., McGraw-Hill, New York, 1996, pp. 20-21.
8 Thusen, G.J. and Fabrycky, W.J., Engineering Economy, 8th ed., Prentice Hall, New Jersey, 1993, pp. 236-246.