Definition of the concepts of conventional and non-conventional projects

Abstract

Anastasia N. Blaset Kastro - Consultant, Compulink Group Address: 45, Michurinskiy Prospect, Moscow, 119607, Russian FederationE-mail: anblaset@gmail.com Nikolay Yu. Kulakov - Chief Financial Officer, Venta Investment & Finance CompanyAddress: 31А, Leningradskiy Prospect, Moscow, 125284, Russian FederationE-mail: nkulakov@gmail.com The term “non-conventional” project or “project with non-conventional cash flows” was introduced into economic literature after the internal rate of return (IRR) was shown to have multiple values or not exist at all in some projects. A project is considered to be conventional if it has only one change in the cash flow sign, no matter whether minus to plus or vice versa. A conventional project has a unique IRR. However, not all projects with a multiple sign change in cash flow are non-conventional, i.e. have problems with IRR determination. To ascertain the project type, the generally accepted approach recommends investigating monotony of the net present value (NPV) depending on the discount rate in order to find out how many IRRs the project has. On the other hand, neither the monotony of the NPV function nor a unique IRR guarantee that the project is conventional. Moreover, it was shown that the rate of return of a non-conventional project cannot be determined within the framework of the NPV method, and therefore the concept of profitability cannot be formulated. The recently proposed generalized net present value (GNPV) method allows us to determine the rate of return of a non-conventional project. This paper presents a method to determine the rate of return for an investment project of any type and proves that in the case of a conventional project the rate of return is the IRR, while in the case of a non-conventional project it is the generalized internal rate of return (GIRR). The necessary and sufficient conditions of conventional and non-conventional projects have been formulated.