Aggregate Return on Investment for Investments under Uncertainty

Carlo Alberto Magni

No 10993, Proyecciones Financieras y Valoración from Master Consultores

Abstract: This paper deals with with capital budgeting decisions under uncertainty. We present an Aggregate Return On Investment (AROI), obtained as the ratio of total (undiscounted) cash flow to total invested capital and show that it is a genuine rate of return which, compared with the risk-adjusted cost of capital, correctly signals wealth creation. The AROI exists and is unique and, for two mutually exclusive projects, we derive an incremental AROI and an incremental risk-adjusted cost of capital, by means of which two unequal-risk projects can be correctly compared. Iterating the incremental procedure, we show that the AROI approach correctly ranks any bundle of different-risk competing projects.

Keywords: Return On Investment; ranking; uncertainty; net present value; rate (search for similar items in EconPapers)
JEL-codes: G11 G12 G31 (search for similar items in EconPapers)
Pages: 17
Date: 2014-02-14
New Economics Papers: this item is included in nep-ore and nep-ppm
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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2335148

Related works:
Journal Article: Aggregate Return On Investment for investments under uncertainty (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:010993

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