An alternative concept of investment for improved profitability measures
Discounted cash flow methods for evaluating investment opportunities enjoy wide acceptance and use in the petroleum industry. The Wo most popular measures are net present value and internal rate of return. While these two measures are generally suitable and equivalent as accept/reject criteria, they are not so useful in capital rationing situations, where a ranking of projects is required. Decades ago authorities suggested that the net present value divided by the initial outlay is a better measure for ranking projects. This kind of measure becomes more difficult to apply correctly when all the capital costs in a project are not incurred up front, but are spread over a number of years. Practitioners commonly discount these future capital outlays back to the present and include them in investment (the divisor in the index). Simple examples demonstrate, however, that some obviously erroneous rankings can result from this procedure. By using an alternative definition of project investment based only on the project net cash flows and the discount rate, we can avoid these pitfalls and obtain a better profitability measure for ranking projects.
- OSTI ID:
- 161816
- Report Number(s):
- CONF-950347-; TRN: 95:008409-0020
- Resource Relation:
- Conference: 37. hydrocarbon economics and evaluation symposium: progress or just survival, Dallas, TX (United States), 26-28 Mar 1995; Other Information: PBD: 1995; Related Information: Is Part Of Proceedings of the hydrocarbon economics & evaluation symposium; PB: 345 p.
- Country of Publication:
- United States
- Language:
- English
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