Characteristics of Criteria for Selecting Investment Projects under Uncertainty

Abstract

Within financial theory and practice, there are used five main criteria for selecting investment projects: the net present value (NPV) criterion, the internal rate of return (IRR) criterion, the return term (RT) criterion, the profitability ratio (PR) criterion and the supplementary return (SR) criterion. The assay will emphasize several new properties of said indexes for investment assessment, having as starting point the hypotheses of (approximately) normal repartition of cash-flows generated by an investment project. The obtained results point to the fact that the NPV indexes (the analysis of this criterion was carried out in the article “The NPV Criterion for Valuing Investments under Uncertainty”, Daniel Armeanu, Leonard Lache, Economic Computation and Economic Cybernetics Studies and Research no. 4/2009, pp. 133-143), IRR, PR, RT and SR register normal repartitions, therefore simplifying the investment analysis under economic uncertainty, by the capacity of building confidence intervals and assessing probabilities for the inferior limits of said investment assessment indexes.

Keywords

• internal rate of return
• cash flow
• topical rate
• uncertainty
• normal repartition
• confidence interval
• mathematical expectation
• square mean deviation of the net present value