OVERALL RATES OF RETURN: INVESTMENT BASES, REINVESTMENT RATES AND TIME HORIZONS

ABSTRACT

This paper compares and contrasts several previously proposed rate of return capital budgeting methodologies. It focuses on recently proposed overall rate of return methods that provide NPV-consisient project evaluations. The examination is undertaken by introducing a conceptual framework to characterize rate of return methods along the following three parameters: (1) the investment base, (2) the reinvestment rate, and (3) the lime horizon over which projects are evaluated. This parametric framework highlights differences among alternative rate of return methods so that they can be easily compared and contrasted. Additionally, the examination suggests appropriate potential applications for the alternative methodologies.

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Notes on contributors

DAVID M. SHULL

DAVID M. SHULL is an Assistant Professor of Finance in the Richard T. Farmer School of Business Administration at Miami University, Oxford, Ohio. He received his B.A. in political science from the University of Louisville in 1981. He received his M. B.A. in 1986 and his Ph.D. in 1988 from Indiana University. His teaching and research interests include capital budgeting, investments, tax policy impacts, mergers and acquisitions, and valuations.