Internal Rate Of Return Calculations Research Articles

A Cost and Returns Evaluation of Alternative Dairy Products to Determine Capital Investment and Operational Feasibility of a Small-Scale Dairy Processing Facility

This study examines the economic feasibility of 50-and 500-cow dairy processing facilities for fluid milk, yogurt, and cheese. Net present value and internal rate of return calculations for projected costs and returns over a 10-yr period indicate that larger yogurt and cheese processing plants offer the most profitable prospects, whereas a smaller yogurt plant would break even. A smaller cheese plant would have insufficient returns to cover the cost of capital, and fluid milk processing at either scale is economically infeasible. Economic success in processing is greatly contingent upon individual business, financial management, and marketing skills.

Subjective Economic Risk to Beneficiaries in Notional Defined Contribution Accounts

AbstractThis article aims to quantify the aggregate subjective economic risk to which beneficiaries would be exposed if a retirement pension system based on notional account philosophy were introduced. We use scenario generation techniques to make projections of the factors that determine the real expected internal rate of return (IRR) and the expected replacement rate (RR) for the beneficiary according to six retirement formulae based on the most widely accepted rates or indices. We then apply the model to the case of Spain. Our projections are based on Herce and Alonso's macroeconomic scenario 2000–2050 (2000) and include information about the past performance of the indices and the time period the forecast is to cover. The results of the IRR calculation—average value, standard deviation, and value‐at‐risk (VaR)—are analyzed both in objective terms and for different degrees of participants' risk aversion.

An economic reappraisal of the Melamchi water supply project - Kathmandu, Nepal

This paper examines whether the benefits of the Melamchi water supply project in Nepal are likely to exceed its costs, assuming that high-quality municipal water services can be delivered to households and firms in the urbanized part of the Kathmandu Valley. Monte Carlo simulations are used to explore the sensitivity of the net present value and economic internal rate of return calculations to a wide range of assumptions and input parameters. We find that extreme assumptions are not required to generate large differences in economic feasibility; quite plausible differences in the values of some key parameters can lead to large differences in the economic attractiveness of the project. The results reveal that the three most important influences on net present value and economic internal rate of return are: (i) the discount rate and discounting procedure; (ii) the magnitude of monthly benefits for households connected to the new water system; and (iii) the annual growth rate in monthly benefits of connected households after the project comes on line. Our contribution lies in illustrating, with an actual case study in a developing country, the degree to which cost-benefit calculations of large infrastructure projects are influenced by key economic modeling assumptions and input parameters.

Energy productivity investments under differing economic conditions and tax structures

In this paper, the effect of uncertainty in internal rate of return calculations caused by imperfect predictions of prices, costs, and business conditions are modeled. Comparing the calculated results shows that the effects of uncontrollable parameters such as recession, price competition, and unexpected repair costs have a greater influence on return on investment than tax credits or depreciation rates. In addition, even if a project overcomes some designated hurdle rate, it must then compete with other highly-rated projects, energy-saving or not, on the basis of intangible factors that comprise the art known as business judgment. Thus tax credits and accelerated depreciation will often not have as large an effect on promoting energy efficiency investments as anticipated.

Rates of Return and Government Subsidization of the Canadian Pacific Railway: Some Further Remarks

In a recent note, Mercer (1973) provides some alternative calculations to mine (George, 1968b) for analysing the perennial question whether 'excessive' subsidies were paid for the construction of the Canadian Pacific Railway. The main thrust of Mercer's argument is that such calculations ought to be based upon 'the economic (internal) rate of return which has a foundation in neoclassical theory' and not upon 'the accounting technique used by George.'1 This note is addressed to three questions. The first concerns Mercer's claims for the superiority of internal rate of return calculations. The second and third are independent of this first issue and concern the different ways in which Mercer and I conceive of the CPR project and the desirability of the incltusion of various cost and subsidy items.

Decision-Making Allowing for Uncertainty of Future Investment Opportunities

All capital investment decisions are made under varying degrees of risk and uncertainty. Evaluations of the desirability of capital investments require estimates of present conditions as well as forecasts of future events which involve these risks and uncertainties. Several recently developed models for capital investment decision-making have involved the random variable treatment of anticipated cash flows. When present worth calculations are made in these cases, a fixed interest rate is usually assumed. When internal rate of return calculations are made, the minimum acceptable rate of return is given a fixed value. This paper treats the minimum attractive rate of return (used with present worth calculations) and the minimum acceptable internal rate of return (used with internal rate of return calculations) as stochastic variables having subjective probability distributions. This procedure takes explicit account of the uncertainty of future investment opportunities. It is shown that, under certain circumstances, significant differences in the values of the mean and the variance of the criteria for making the investment decision are obtained when the results of this procedure are compared with results using the usual deterministic interest rate or minimum acceptable rate of return.