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Non‐monotonic NPV Function Leads to Spurious NPV s and Multiple IRR Problems: A New Method that Resolves these Problems
Author(s) -
Arjunan Kannapiran C.
Publication year - 2019
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/1759-3441.12239
Subject(s) - monotonic function , spurious relationship , function (biology) , mathematics , econometrics , statistics , biology , mathematical analysis , evolutionary biology
The causes and effects of non‐monotonic NPV functions are evaluated and the results presented in this paper. Reinvestment of intermediate income causes non‐monotonic NPV function. Non‐monotonic NPV function not only leads to multiple IRR s but also to spurious NPV s. The capital amortisation ( CAS ) method used in this analysis transparently reveals if there is any reinvestment. A modified CAS method, discussed in this paper, eliminates the reinvestment and resolves the problems of non‐monotonic NPV function, reinvestment, spurious NPV s and multiple IRR . The current practice of using NPV as the preferred criterion, when there are multiple IRR s, is not appropriate.