Richard H. Bernhard

A Comprehensive Comparison and Critique of Discounting Indices Proposed For Capital Investment Evaluation

Abstract In the traditional literature of engineering and managerial economics, a variety of different and not generally consistent indices have been proposed for deciding whether a given capital investment project should be undertaken. Using mathematical programming, it is shown herein that in an unconstrained situation under certainty, with complete freedom to borrow or lend at one rate of interest, the present worth index and its equivalents are correct while indices inconsistent with present worth are wrong. However, in the presence of further constraints, e.g., on allowed borrowing or on available scarce material, even the present worth index is unsatisfactory, and, in general, a complete mathematical programming solution is required.

On the Choice of the Sharing Fraction for Incentive Contracting

ABSTRACT Under incentive contracting, a private firm agrees to do work for the government or another private firm in such a way that the two parties Jointly share the gain or loss from any deviation between the actual cost and the target cost of the work. A commonly proposed method for setting the level of the sharing fraction is shown herein to be inadequate because it is not. in general, Pareto-optimal. Though the goal of achieving Pareto-optimality is advocated, it is further shown that this goal may be in conflict with that of encouraging cost reduction by the contractor.

Some Problems in the Use of a Discount Rate for Constrained Capital Budgeting

Abstract Widely advocated mathematical programming models for constrained capital budgeting call for the maximization of total net present value of undertaken projects. However, very little attention has been given to the problem of choosing a suitable discount rate. Baumol and Quandt concluded that, if reference is limited to the model itself, a meaningful choice of rate cannot be made. Recent proposals of Mao and of Lusztig and Schwab contradict that conclusion. This paper supports Baumol and Quandt including their alternative of using externally specified utilities in the objective function. Using the dual model, it is shown that correct discounting factors cannot be specified independent of these external utilities.

Income, Wealth Base and Rate of Return Implications of Alternative Project Evaluation Criteria

ABSTRACT Though net present value and sets of internal rates of return are completely equivalent criteria for project acceptability decisions, they collectively offer an infinite number of differing implications with regard to levels of project incomes, wealth bases and rates of return. If reinvestment is assumed, there are also sets of average rates of return, equivalent for project acceptability decisions and corresponding, one-to-one, with sets of internal rates and their implications. But the popular constant average and internal rates do not correspond in this way; thus, in general, they differ with regard to project income, wealth base and rate of return implications.