Note that the numerator is the same for both yardsticks. However, the investment efficiency parameter uses only the present value of the early negative NCFs in the denominator. The present value of the MNCF is defined in this case as the greatest cumulative discounted out-of-pocket expense. The discounted profit to investment ratio keeps all investments separate and uses the cumulative present value of each investment as the denominator. The significance of this difference has not been rigorously tested to our knowledge. It is believed, however, that the investment efficiency can be best applied when the investor believes that the project itself finances some or all of future project investments, in contrast to the case when it is felt that all future investments must go through the budgeting process and compete with other projects for investment capital. In the case of smaller projects that generate cash rapidly, the investment efficiency parameter may be the best one. In cases where major capital expenditures occur over several years, however, the profit to investment ratio may be more representative of the actual process. Regardless of which parameter you use, be consistent! | Note that the numerator is the same for both yardsticks. However, the investment efficiency parameter uses only the present value of the early negative NCFs in the denominator. The present value of the MNCF is defined in this case as the greatest cumulative discounted out-of-pocket expense. The discounted profit to investment ratio keeps all investments separate and uses the cumulative present value of each investment as the denominator. The significance of this difference has not been rigorously tested to our knowledge. It is believed, however, that the investment efficiency can be best applied when the investor believes that the project itself finances some or all of future project investments, in contrast to the case when it is felt that all future investments must go through the budgeting process and compete with other projects for investment capital. In the case of smaller projects that generate cash rapidly, the investment efficiency parameter may be the best one. In cases where major capital expenditures occur over several years, however, the profit to investment ratio may be more representative of the actual process. Regardless of which parameter you use, be consistent! |