Evaluation of the GNPV Method for Decision-making in Non-conventional Projects

Abstract

Kulakova and Kulakov (2012) have presented the generalised net present value (GNPV) method to evaluate non-conventional projects. They have illustrated the method with three examples: a project of 2-year life with multiple internal rate of returns (IRRs), a project of 2-year life without IRR and a project of 3-year life with a unique real-valued IRR, which is not the rate of return. The purpose of the present study was to test the validity and feasibility of the GNPV method in evaluating other non-conventional projects with a longer life. The method was used to evaluate five scenarios: a project of 5-year life with multiple IRRs; a project of 7-year life with multiple IRRs, which were not the rates of return; a project of 10-year life with a positive and a negative IRR meaning the positive value was the unique IRR; a project of 7-year life with a salvage value and a unique IRR; and a staged expansion project of 10-year life with a unique IRR. It was concluded that the GNPV method worked in all the five cases considered. Advantages of the GNPV method were noticed in agreement with Kulakova and Kulakov (2012) that (i) the minimum attractive rate of return (MARR) was not required to find a solution; (ii) the internal (financing) rate may be different from the external (reinvestment) rate; and (iii) internal and external rates are not necessarily required for solution, but are required for evaluation of the projects. One disadvantage was observed that the computational work in some cases might be overwhelming.

Keywords

Generalised net present value (GNPV)non-conventional project internal rate of return (IRR)internal (financing) rate external (reinvestment) rate generalised IRR (GIRR)generalised external RR (GERR)

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