Theoretical Analysis of Net Present Value
DOI:
https://doi.org/10.54691/bcpbm.v30i.2517Keywords:
Net Present Value, Review, IRR, Real Option.Abstract
This paper reviews researches on net present value done by researchers in the past 25 years to summarize the research results and put forward limitations. Although the investment decision guided by net present value possesses a long history and investors use it widely in the current financial market, the author believes that it still has the value of being discussed and studied. After a comprehensive review, it is found that in the past 25 years, the research on net present value has focused on comparing its advantages and disadvantages with other investment decision-making schemes and how to apply the NPV approach to special industries, but less follow-up on the actual progress of subsequent investment projects. Despite the NPV approach is generally accepted as the gold standard for enterprises to make investment decisions, with the continuous development of international finance and economy, the success rate of using the NPV approach for investment might be extraordinarily different from that when the NPV approach was initially popularized. After the review, this paper finds that researchers lack practical consideration for the NPV approach. Therefore, the significance of this review is to attract researchers' attention to the above issue so as to make up for the gap in the later stage of research on the implementation of the NPV approach.
Downloads
References
E., Berkovitch, & R. Israel. Why the NPV criterion does not maximize NPV. The Review of Financial Studies, 17(1), (2004) 239-255. DOI: 10.1093/rfs/hhg023
S.,Ye, & R. L., Tiong. NPV-at-risk method in infrastructure project investment evaluation. Journal of construction engineering and management, 126(3), (2000) 227-233. DOI: 10.1061/(ASCE)0733-9364(2000)126:3(227)
C. A., Magni, & A., Marchioni. Average rates of return, working capital, and NPV-consistency in project appraisal: A sensitivity analysis approach. International Journal of Production Economics, (2020) 229. DOI: 10.1016/j.ijpe.2020.107769
A., Marchioni, & C. A., Magni. Investment decisions and sensitivity analysis: NPV-consistency of rates of return. European Journal of Operational Research, 268(1), (2018) 361-372. DOI: 10.1016/j.ejor.2018.01.007
S. P., Feinstein, & D. M., Lander. A better understanding of why NPV undervalues managerial flexibility. The Engineering Economist, 47(4), (2002)418-435. DOI: https://doi.org/10.1080/00137910208965043
H. T., Smit, & L., Trigeorgis. Strategic NPV: Real options and strategic games under different information structures. Strategic Management Journal, 38(13), (2017) 2555-2578. DOI: https://doi.org/10.1002/smj.2665
T. T., Lin. Applying the maximum NPV rule with discounted/growth factors to a flexible production scale model. European Journal of Operational Research, 196(2), (2009) 628-634. DOI: 10.1016/j.ejor.2008.04.004
M., Hopkinson. The case for project net present value (NPV) and NPV risk models. In The Evolution of Project Management Practice (2017) pp. 61-68.
D., Espinoza, & J. W., Morris. Decoupled NPV: a simple, improved method to value infrastructure investments. Construction management and economics, 31(5), (2013) 471-496. DOI: https://doi.org/10.1080/01446193.2013.800946
K., Arjunan. IRR Performs Better than NPV: A Critical Analysis of Cases of Multiple IRR and Mutually Exclusive and Independent Investments. Revised and updated version as of, (2017)23. DOI: http://dx.doi.org/10.2139/ssrn.2913905
S. L., Tang, & T. H., John. The variable financial indicator IRR and the constant economic indicator NPV. The Engineering Economist, 48(1), (2003)69-78. DOI: https://doi.org/10.1080/00137910308965052
M. J., Osborne. A resolution to the NPV–IRR debate? The Quarterly Review of Economics and Finance, 50(2), (2010)234-239. DOI: 10.1016/j.qref.2010.01.002
M. T., Bosch, S. J., Montllor, & M. A., Tarrazon. NPV as a function of the IRR: the value drivers of investment projects. Journal of applied finance, 17(2), (2007) 41.
T. A., Weber. On the (non-) equivalence of IRR and NPV. Journal of Mathematical Economics, 52, (2014)25-39. DOI: 10.2139/ssrn.2025636
E., Bas. A robust approach to the decision rules of NPV and IRR for simple projects. Applied Mathematics and Computation, 219(11), (2013) 5901-5908. DOI: 10.1016/j.amc.2012.12.031
K., Arjunan. A New Method to Estimate NPV and IRR from the Capital Amortization Schedule and an Insight into Why NPV Is Not the Appropriate Criterion for Capital Investment Decision. (2017) Available at SSRN 2899648.
D., Armeanu, & L., Lache. The NPV criterion for valuing investments under uncertainty. Economic Computation and Economic Cybernetics Studies and Research, 4, (2009) 43.
T., Arnold, & R. Shockle. Real options analysis and the assumptions of the NPV rule. Baton Rouge, LA, USA. (2002).
F., Pries, T., Astebro, & A., Obeidi. Economic analysis of R&D projects: Real option versus NPV valuation revisited. Department of Management Sciences, University of Waterloo, Canada, (2001) 03-10.
J., Goldenberg, B., Libai, S., Moldovan, & E., Muller, (2007). The NPV of bad news. International Journal of Research in Marketing, 24(3), 186-200.
R., Kumar, A., Sharma, K., & P. C., Tewari (2015). Cost analysis of a coal-fired power plant using the NPV approach. Journal of Industrial Engineering International, 11(4), 495-504.
D., Vučina, Ž., Lozina, & F., Vlak (2010). NPV-based decision support in multi-objective design using evolutionary algorithms. Engineering Applications of Artificial Intelligence, 23(1), 48-60.
Downloads
Published
Issue
Section
How to Cite
