NPV, IRR, PI, PP, and DPP: A unified view

Mikhail Sokolov

Journal of Mathematical Economics, 2024, vol. 114, issue C

Abstract: This paper introduces a class of investment project's profitability metrics that includes the net present value (NPV) criterion (which labels a project as weakly profitable if its NPV is nonnegative), internal rate of return (IRR), profitability index (PI), payback period (PP), and discounted payback period (DPP) as special cases. We develop an axiomatic characterization of this class, as well as of the mentioned conventional metrics within the class. The proposed approach offers several key contributions. First, it provides a unified interpretation of profitability metrics as indicators of a project's financial stability across various economic scenarios. Second, it reveals that, except for the NPV criterion, a profitability metric is inherently undefined for some projects. In particular, this implies that any extension of IRR to the space of all projects does not meet a set of reasonable conditions. A similar conclusion is valid for the other mentioned conventional metrics. For each of these metrics, we offer a characterization of the pairs of comparable projects and identify the largest set of projects to which the metric can be unequivocally extended. Third, our study identifies conditions under which the application of one metric is superior to others, helping to guide decision-makers in selecting the most appropriate metric for specific investment contexts.

Keywords: Capital budgeting; Net present value criterion; Internal rate of return; (Discounted) Payback period; Profitability index (search for similar items in EconPapers)
JEL-codes: G11 G31 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304406824000545
Full text for ScienceDirect subscribers only

Related works:
Working Paper: NPV, IRR, PI, PP, and DPP: a unified view (2024)
Working Paper: NPV, IRR, PI, PP, and DPP: A Unified View (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:114:y:2024:i:c:s0304406824000545

DOI: 10.1016/j.jmateco.2024.102992

Access Statistics for this article

Journal of Mathematical Economics is currently edited by Atsushi (A.) Kajii

More articles in Journal of Mathematical Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().