The Suitability of the Perpetuity Rate of Return as a Project Evaluation Criterion

ABSTRACT

This paper discusses the Perpetuity Rate of Return (PRR) criterion for evaluating investment projects, introduced recently by K.M. Howe (“Perpetuity Rate of Return Analysis,” The Engineering Economist, Vol.36, No.3, Spring 1991, pp.248-257) and intended as a substitute for the much criticized Internal Rate of Return. The discussion shows that the PRR does not reflect the project's true rate of return; that it is not Net Present Value compatible for non-positive market interest rates; and that it cannot be universally applied to the evaluation of mutually exclusive projects. An alternative criterion to the PRR, the ARR, has been developed without the necessity of resorting to the artificial assumptions required by the PRR. It has been concluded that neither the PRR nor the ARR contribute anything of consequence to the current procedures of project evaluation, and that they both are, in fact, inferior mutants of the traditional Profitability Index.