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| Author: | Bernhard, R. H. |
| Title: | Base selection for modified rates of return and its irrelevance for optimal project choice. |
| Journal: | Engineering Economist
1989 : FALL, VOL. 35:1, p. 55-65 |
| Index terms: | RATE OF RETURN PROJECT EVALUATION CHOICE THEORY CAPITAL INVESTMENT CAPITAL MARKETS |
| Language: | eng |
| Abstract: | "Modified" rates of return for capital investment evaluation and the issue of the type of rate base to be used there are reviewed. It is shown that the base type recently proposed by Beaves is actually identical to one previously proposed by Lin. In any event, under certainty and a perfect capital market, it is demonstrated that the base rate issue is irrelevant in that project selection by optimal rate of decision rules. That is rules consistent with net present worth analysis, invariably give project selection which is independent of the choice of rate base type. Also discussed are some potential misapplications of "modified" rates, and correct means for avoiding those are offered. |
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