A Companion For NPV: The Generalized Relative Rate of Return

Samuel Chiu and Enrique Garza Escalante

The Engineering Economist, 2012, vol. 57, issue 3, 192-205

Abstract: We show how to determine a unique rate, for a particular cash flow stream, that is used only whenever a project demands outside resources to compound the rates of the existing term structure precisely at those times. The net present value of the cash flow stream when discounted with the thus-modified term structure becomes zero. We therefore determine a vector of rates that belongs to the induced space of internal rates of return for that cash flow stream. The rate is applicable under discrete stochastic interest rate representations and provides maximum loan rates that may be contracted only when needed thus keeping a project financially autonomous. (Any investments required may be fully repaid by the project's own cash outflows).

Date: 2012
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DOI: 10.1080/0013791X.2012.702198

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