Evaluation of Nonconventional Projects

Abstract

This article introduces the generalized net present value (GNPV) method for nonconventional project evaluation. This method generalizes the NPV method by using two discount rates: the finance rate for positive present values and the reinvestment rate for negative present values. As a result, the different rates discount cash flows invested in the project and released by the project. The GNPV method allows us to consider any nonconventional project as an investment or a loan. Therefore, each nonconventional project always has two rates of return; that is, GIRR(p) and GERR(r), depending on the reinvestment and the finance rate, respectively. The GNPV, generalized internal rate of return (GIRR), and generalized external rate of return (GERR) rules for justifying and ranking independent nonconventional projects are proposed. These rules do not contradict each other. A graphical interpretation (“GNPV diagram”) of the decision-making rules is suggested. The GNPV method is applied to the solution of the Lorie-Savage oil pump problem and the rate of return is determined for a project without IRR.