Analysis of the Cash Recovery Rate's Potential Application in Determining the Social Cost of Capital
Abstract
This study explored the potential application of the cash recovery rate in determining the social cost of capital. It specifically investigated the results of using cash-recovery rate-based, internal rate of return-estimating relationships, which were formulated under assumptions of constant investment growth rate, to estimate internal rates of return for simulated firm-level financial data generated using both exponentially increasing and sinusoidal investment growth rates. An extensive literature review is used to build a analytical link between the need for updating the social discount rate, capital budgeting decisions based on internal rates of return, and the proposed behavior of the cash recovery rate as a surrogate for the internal rate of return. Analysis of the estimated internal rates of return, based on an algorithm developed by the author, indicates the relationships remain valid under the more complex growth rate patterns. This result further supports the use of cash recovery rates as a means of measuring firm profitability and also strengthens the case for additional research into applying an opportunity cost of capital approach for the selection of a social discount rate based on a nationally averaged internal rate of return.
Document Details
- Document Type
- Technical Report
- Publication Date
- Sep 01, 1991
- Accession Number
- ADA246731
Entities
People
- Francis J. Geiser Iii
Organizations
- Air Force Institute of Technology