The Compatibility of Major Economic Criteria for Project Evaluation

Organization: The Australasian Institute of Mining and Metallurgy
Pages: 7
Publication Date: Jan 1, 1991
The most frequently applied project evaluation criteria are the Net Present Value, the Internal Rate of Return, and the Pay Back Period. Unfortunately, the Internal Rate of Return and the Pay Back Period, if interpreted according to their traditional definitions, easily produce results which contradict the Net Present Value. The reasons for the Net Present Value incompatibility of the two criteria are that these criteria have not been adequately defined and so new, complete definitions are recommended. The concept of the True Rate of Return is proposed as a substitute for the interest rate that the Internal Rate of Return has been believed to represent. The redefined Internal Rate of Return and Pay Back Period criteria, as well as the True Rate of Return are all Net Present Value compatible and can, therefore, serve as independent project evaluation criteria. Also, the correct approach to the evaluation of mutually exclusive alternatives and the status of the often neglected borrowing projects in project evaluation are found to be quite important.
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