The alleged superiority of the discounted present value criterion compared with the internal rate of return criterion and the net benefit ratio

1 Consider the three alternative investment streams A, B and C, shown in Table 25.1. The undiscounted net benefit ratio (B − K)/K, in which B represents the net benefit in the first and only year in which benefits accrue, with K representing the initial capital outlay in year zero, will here serve as the criterion, one that will rank C above B, and B above A. Why the undiscounted net benefit ratio? For the simple reason that, whatever the rate of discount used, it will affect the net benefit at t ₁ of A, B and C in exactly the same proportion. We may therefore infer that, irrespective of the discount rate used, the resulting discounted net benefit ratio would give the same ranking as the undiscounted net benefit ratio. Table 25.1 t₀ ^t ₁ (B − K)/K Internal rate of return A −100 105 5/100 5% B −100 115 15/100 15% C −100 125 25/100 25%