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Purchasing power return, a new paradigm of capital investment appraisal

David DeBoeuf (Department of Accounting and Finance, Western Illinois University, Macomb, Illinois, USA)
Hongbok Lee (Department of Accounting and Finance, Western Illinois University, Macomb, Illinois, USA)
Don Johnson (Department of Accounting and Finance, Western Illinois University, Macomb, Illinois, USA)
Maksim Masharuev (Western Illinois University, Macomb, Illinois, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 12 February 2018

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Abstract

Purpose

The purpose of this paper is to contribute to financial managers’ capital budgeting decision-making processes by proposing a new paradigm of capital investment appraisal. The expected return, required return structure of the proposed purchasing power return (PPR) methodology eliminates the many flaws associated with the competing internal rate of return (IRR) and modified IRR (MIRR) techniques.

Design/methodology/approach

The authors provide a new framework for examining long-term investment projects through a percentage return prism. Unlike that of IRR and MIRR, mathematical consistency with net present value (NPV) is a design requirement.

Findings

PPR eliminates the many flaws found in the IRR and MIRR methodologies, is mathematically consistent with NPV, and identifies positive-NPV investments forecasted to reduce the company’s purchasing power. These projects are acceptable under NPV, but flagged for additional review and potential rejection. Created to examine projects on a percentage return basis, PPR employs market-based inflation rates to convert all cash flows into constant purchasing power units of measure. From these units, an expected real return is estimated and compared to the project’s inflation-adjusted required return, resulting in an accept/reject decision consistent with that of NPV.

Originality/value

The proposed PPR is a new paradigm of capital investment appraisal that eliminates the many problems found in the IRR and MIRR techniques, is mathematically consistent with the NPV method, and helps financial decision makers examine investment projects on an expected percentage return basis. PPR also flags for further review projects expected to actually reduce the company’s purchasing power.

Keywords

Acknowledgements

Associate Editor Michael Casey served as Editor for this paper.

Citation

DeBoeuf, D., Lee, H., Johnson, D. and Masharuev, M. (2018), "Purchasing power return, a new paradigm of capital investment appraisal", Managerial Finance, Vol. 44 No. 2, pp. 241-256. https://doi.org/10.1108/MF-07-2017-0265

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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