NPV-COMPATIBILITY, PROJECT RANKING, AND RELATED ISSUES

ABSTRACT

The presented paper addresses the question of the NPV-compatibility of the Overall Rates of Return (ORRs), and analyses two project ranking procedures that were advocated in the recent contribution “Overall Rates of Return: Investment Basis, Reinvestment Rates and Time Horizons” by D.M. Shull (The Engineering Economist, Vol.39, No.2, Winter 1994, pp. 139-163). The paper indicates that the current definitions of the ORRs are not fully NPV-compatible, and it provides a generalized, NPV-compatible ORR definition. The paper further shows, using numerical examples, that the two project ranking procedures adopted by Shull are conceptually inadequate. It presents the correct approach to project-ranking, and proves that this approach can be used in conjunction with any NPV-compatible profitability criterion. Also, the paper addresses and rectifies some inaccurate statements and formulas in Shull's contribution. Finally, it is noted that Shull's Scale-Adjusted Return Method was, in fact, introduced nineteen years ago by P.J. Athanasopoulos (“A Note on the Modified Internal Rate Of Return and Investment Criterion, ” The Engineering Economist, Vol.23, No.2, Winter 1978, pp. 131-133).

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Notes on contributors

MIROSLAW M. HAJDASIŃSKI

MIROSLAW M.HAJDASIŃSKI holds a B.S. and an M.Sc. in Mining Engineering and a Ph.D. in Mine Economics from the University of Mining and Metallurgy in Cracow, Poland. He also conducted research at the Technical University Clausthal, Germany, and at the Technical University Eindhoven, The Netherlands. In 1982, Dr. Hajdasinski joined Laurenlian University in Sudbury, Ontario, Canada, where he is currently a professor in the School of Engineering. His research focuses on project evaluation techniques and applications of Industrial Engineering and Operations Research in the Minerals Industry. Dr. Hajdasiński is a professional engineer registered in the province of Ontario.