ABSTRACT
B, as in Table 25.2. Both of these are ranked equally by the IRR criterion, being 10 per cent in each case. Not surprisingly then, if the discount rate employed also happened to be 10 per cent, the discounted net benefit ratio (B− K)/K would be zero for both A and B, as (B − K) would equal zero using a 10 per cent discount rate. Were the discount rate equal to only 1 per cent, the three-period B stream would show a (B − K)K ratio of 19/100 and would rank above the (B − K)/K ratio for A, of 9/100, the reverse ranking being produced if the discount rate were doubled to become 20 per cent. In that case, B’s discounted net benefit ratio would be equal to −16/100, which is therefore ranked below that of −8/100 for the A stream. A diagrammatic representation of the variation in the discounted net present
value, PVr(B−K)with respect to the rate of discount for each of these investment streams, A andB, is displayed in Figure 25.1, where PVr(B−K) is measured along the vertical axis and the rate of discount r along the horizontal axis. It can be seen at a glance that discounted net benefit PVr(B− K) for each of the two streams of investment – indeed, for any investment stream – varies inversely with the rate of discount r.
