chapter  3
Investment decision criteria
WithJ. Schofield
Pages 10

This chapter discusses the application of the 'fundamental rule' through use of subsidiary project appraisal criteria. It outlines the techniques of compounding to terminal value and discounts to present value as the concepts are important in investment decision making. The chapter also discusses the resolution of the decision criteria conflicts in the separate cases of mutual exclusivity and budget or other constraints. There are three criteria widely employed in investment decision making: the net present value criterion, the benefit-cost ratio and the internal rate of return. A characteristic of the three criteria under consideration is that each involves what may be an unrealistic implicit assumption concerning the reinvestment of project proceeds during the life of a project. In order to circumvent the reinvestment problem it is necessary to have information regarding the proportion of annual benefits reinvested. Acceptable investment criteria stem from the 'fundamental rule’ that decisions regarding proposals be made in light of maximizing net benefits.