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Volume :9 Issue : 2 1981      Add To Cart                                                                    Download

Economics of Ranking Mutually Exclusive Investment Project Under Inflation

Auther : M.El-Azma

In analyzing the impact of inflation on decisions concerning allocation of capital, the literature on capital budgeting has been generally concerned with the effect on net present value of a single independent investment opportunity. However, by taking cognizance of the recent emphasis on the portfolio level and general capital market equilibrium in taking financial decisions, it is apparent that there is need to extend the analysis to the case of ranking mutually exclusive investment projects. The purpose of this article is to present an analysis of the impact of changing prices on capital budgeting decisions involving consideration of the concept of “fisher’s intersection”. The assumptions of the model were then relaxed, ceteris paribus, to allow for the introduction of several factors bearing upon the issue. These factors include: the effect of differing depreciation policies under taxation, ranking projects differing in asset lives, sensitivity of products and factors prices to general price-level movement, the effect of different cost structures implied by competing projects, the effect of the monetary debtor creditor hypothesis on ranking, and the effect of capital market imperfection. Throughout the analysis presented in the paper, due consideration was given to the literature pertaining to this topic; by offering a synthesis of some of the arguments, and by extending some of the conclusions arrived at by previous writers on the subject.

 

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