AN EVALUATION OF INVESTMENT CRITERIA,
Abstract
The frequently proposed investment criteria for making optimal investment decisions, which are the present value and internal rate of return rules, are examined under conditions of complete capital rationing. An important consequence of this context is that market rates of interest cannot be used as discount factors. A contribution of this study is a synthesis of two independent analyses of what to do under such circumstances. The problem is resolved by shifting the objective of investment from maximization of a discounted sum of dollar returns to the maximization of utility. This resolution is modeled on Irving Fisher's theory of investment and emphasizes the necessity of utility measures on the objects of investment. A criticism of the internal rate of return rule is the possibility of multiple values. Based on the development of Fisher's theory and its extension to a complete linear programming version of the multiperiod model, a result is obtained which removes the objection of multiple values and shows the equivalence of the internal rate of return and present value rules in the case of perfect capital markets. Another unique feature of the paper is the application of the analytical results to an investment problem involving logistic support of the Polaris weapon system. This application demonstrates the use of utility measures or military essentiality and the relationship to the rate of return concept in military planning. (Author)
Document Details
- Document Type
- Technical Report
- Publication Date
- Jun 17, 1968
- Accession Number
- AD0675952
Entities
People
- S. Scott Sutton
Organizations
- George Washington University