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Journal of Economics and Finance

, Volume 24, Issue 1, pp 90–96 | Cite as

Capital rationing: The general case and a better criterion for ranking

  • Hoi T. Wong
Practitioner’s Corner

Abstract

The definition of net present value implies that the reinvestment rate of return on the intermediate cash flows is equal to the risk-adjusted discount rate of the project. However, in many situations, the two rates are different. Therefore, in capital rationing, the ranking of projects based on net present value is incorrect in those situations. Another problem is that financial managers would prefer to use internal rate of return for ranking, although ranking by net present value is theoretically superior. This paper solves both problems by developing a new ranking criterion.

Keywords

Cash Flow Good Criterion Liquid Asset Terminal Wealth Ranking Criterion 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer 2000

Authors and Affiliations

  1. 1.Department of Business AdministrationSul Ross State UniversityUvalde

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