THE IRR,NPV AND PAYBACK PERIOD AND THEIR RELATIVE PERFORMANCE IN COMMON CAPITIAL BUDGETING DECISION PROCEDURES FOR DEALING WITH RISK

ABSTRACT

The relative performance of six capital budgeting decision procedures for dealing with risk was studied using Monte Carlo computer simulation of long sequences of capital rationing decisions involving risk. Five of the decision procedures included either subjective or objective risk assessment and used common measures of worth: Net Present Value, Internal Rate of Return, and Payback Period. The sixth decision procedure was random selection. Also investigated were (1) the effects of errors in risk assessment and (2) the effectiveness of the decision strategy to prefer opportunities with short-term capital recovery periods to reduce the exposure to risk of the capital invested.

Notes

SHARIFF N.BAKSH eamed bis Ph.D.⁻in Industrial and⁻Operations Engineering at the University of Michigan before joining the faculty of the Univeniii Technologi Malaysia. He is currently Professor and Dean of the Faculty of Mechanical Engineering.

JACK R. LOHMANN is Professor of Industrial and Systems Engineering and Associale Dean, College of Engineering, at the Georgia Institute of Technology. He is also Editor of The Engineering Economist