About IRR and new investment priority index
2024
Sneps-Sneppe, Manfred | Smirnov, Dmitry
The two most important criteria are the net present value (NPV) and the internal rate of return (IRR) for choosing among investment projects. The analysis of IRR and NPV indicates an unequivocal choice among the criteria NPV and IRR. We prepare the IRR rule. The static investment optimization problem of IRR is solved as the optimal usefulness of the well-known mathematical result of the knapsack problem. The word “static” means that all projects under consideration have equal duration. The dynamic optimization problem of investments is solved in the case of one-time costs by obtaining results at different points in time (distributed lags), namely, by the fragmentation of the project. The key result is the new investment priority index offering a simple formula for optimal choice among “one-time investments and distributed lags” projects by splitting these projects by time. The procedure how to split the project by time is given. The most general case — distributed in time costs and results — can be built with approximate heuristic solutions. For discussion purposes, a relatively simple investment project is considered numerically.
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Издатель Latvia University of Life Sciences and Technologies
