Investment appraisal: A new approach

Abstract

This paper addresses a theoretical weakness inherent in the typical application of the net present value approach to investment appraisal. This weakness concerns the assumption that the estimated cash flows occur at the end of each period rather than the more realistic assumption of occurring on a continuous basis. Continuous cash flows are introduced and, more significantly, continuous discount factors (CDF) are estimated. The impact of using CDFs is examined in a simple project appraisal and compared to discrete discount factors. It is shown that the acceptance or rejection of marginal investment projects may depend on the type of discount factor used. Similarly, the impact upon the internal rate of return method is addressed. Finally directions for further theoretical developments are suggested.

Citation

Pogue, M. (2004), "Investment appraisal: A new approach", Managerial Auditing Journal, Vol. 19 No. 4, pp. 565-569. https://doi.org/10.1108/02686900410530565