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The purpose of this paper is to analyze the suitability of the real option methods in the valuation of WiMAX networks. Particularly, the shapes of the probability distributions for the investment costs and net present values (NPV) are examined.

The study analyzes the costs and NPV distributions by simulating an investment project in a rural area. The paper examines the influences of different uncertainty models and the shapes of the resulting investment costs, NPVs, and NPV ratios. The simulated option values are compared to results from different analytical equations.

The analysis in this study shows that the shape of the uncertainty – or error – in the parameters does not affect the shapes of the investment costs or NPV distribution. Instead, the subject of the uncertainty – i.e. the parameters for which the uncertainty is modeled – matters.

The study shows that the uncertainties and opportunities in network investments may increase the value of the projects dramatically and thus they should be taken into account. The shape of the NPV distribution varies depending on the technology and construction strategy of the network. This makes the real option valuation challenging since the assumptions of the valuation models must be satisfied for reliable results. Analytical option valuation formulas give the same results as simulation, only if the assumptions are sufficiently fulfilled and the parameters properly estimated.

The uncertainty in the service rate growth or population growth parameter influences the resulting distributions. The investment costs are positively skewed and can be approximated by a log‐normal distribution. This makes NPV negatively skewed, which suits badly in the existing analytical option valuation methods assuming log‐normal assets. Also, the NPV ratio is correlated with the investment costs.

Public and private sector managers make investment decisions under uncertainty. Economic efficiency requires that managers who wish to maximize expected utility use NPV. A field test reports that a lower proportion of public managers (20%) utilize NPV than private managers (46%). This difference is significant at p = .01 in both logistic regression and chi-square tests for three competing, but not mutually exclusive, reasons. First, taxpayers are a primary source of capital. Taxation decisions are primarily political events and inefficiency is less likely to be disciplined by capital withdrawal. Second, it is more difficult to estimate expected benefits and costs. Third, investment decisions are often the result of political, not economic, processes. The objective may not be maximization of NPV.

Capital budgeting plays an essential role in a firm's long‐term viability and survival. The capital budgeting process includes: identification of potential projects, prediction of possible outcomes, project selection, financing and implementation of the chosen project, and monitoring project performance (Mukherjee and Henderson, 1987). Although economic considerations should govern the capital budgeting decision, individual opinions and preferences often become primary factors affecting project selection.

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.

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.

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.

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.

Considers the resource‐constrained project scheduling problem where cash inflows and outflows are tied to the occurrence of events. The objective is the maximization of the project net present value (NPV) as well as the minimization of project tardiness in the presence of a project due date. Develops hybrid scheduling rules with both NPV and tardiness considerations to enhance both objectives. Experiments extensively with a set of benchmark problems originally designed for the objective of minimizing the project duration. Demonstrates that thje hybrid rules developed here are superior in performance with respect to both objectives when compared with well known rules which are developed for the two objective of minimizing the project duration. Demonstrates that the hybrid rules developed here are superior in performance with respect to both objectives when compared with well‐known rules which are developed for the two objectives taken individually. Furthermore, the iterative algorithm improves the performance of all tested rules significantly.

This study aims to determine the optimal value of concession period length in combination with capital structure in build–operate–transfer (BOT) contracts, based on direct negotiation procurement and considering the conflicting financial interests of different parties involved in the project.

The financial model of a BOT project is developed considering all the influencing factors. Then, fuzzy set theory is used to take into account the existing risks and uncertainties. Bilateral bargaining game based on alternating-offers protocol is applied between the government and the sponsor to divide project financial benefit considering the lender’s requirements. Finally, concession period and equity level will be determined simultaneously according to the sponsor’s and government’s share of project financial benefit and the lender’s requirements.

The proposed model is implemented on a real case study, and a fair and efficient agreement on concession period length and capital structure is achieved between the government and the sponsor considering the lender’s requirements. It is revealed that being the first proposer in the bargaining process will affect the concession period length; however, it will not affect the equity level. Moreover, it is shown that considering income tax as a part of government’s financial benefit increases the length of concession period.

The presented model concentrates on direct negotiation procurement in BOT projects where the sponsor and government bargain on dividing financial benefits of project. It is assumed that the product/service price is determined before according to market analysis or users’ affordability. All the revenue of project during concession period is assumed to belong to the sponsor.

The proposed model provides a practical tool to aid BOT participants to reach a fair and efficient agreement on concession period and capital structure. This could prevent failing or prolonging the negotiation and costly renegotiation.

By investigation of previous studies, it is revealed that none of them can determine the optimal value of concession period length and capital structure simultaneously considering the BOT negotiation process and different financial interests of parties involved in the project. The proposed model presents a new approach to determine the financial variables considering the conflicting interests of involved parties. The other novelty aspects of the presented model are as follows: introducing a new approach for calculating the sponsor and the government’s share of project financial benefit that will affect the determination of the concession period length and considering the effect of existing risks and uncertainties on final agreement between the involved parties using fuzzy set theory.

It is well known that internal rate of return (IRR) and net present value (NPV) rankings of mutually exclusive investments are sometimes inconsistent. This inconsistency, when it occurs, requires decision makers to choose between the two ranking methods. The purpose of this paper is to deduce sufficient conditions for consistent IRR and NPV investment rankings of mutually exclusive investments.

Deductive reasoning is used to obtain the sufficient conditions required for consistent rankings of mutually exclusive investments.

There are different sufficient conditions (methods) that can be used to resolve inconsistent IRR and NPV rankings. However, the different methods do not necessarily produce the same consistent rankings. In particular, different size adjustment methods and reinvestment rate assumptions can produce different IRR and NPV consistent rankings. This paper suggests the appropriate criteria for selecting a particular method for ranking mutually exclusive investments.

Like all deduced models, the results apply only to the set of assumptions and preconditions adopted in the model. Furthermore, the application is to ranking mutually exclusive investments.

There is probably no other issue in the capital budgeting literature that has generated more attention and debate than the consistency (or lack thereof) between IRR and NPV rankings. This paper summarizes conditions that can be followed to resolve the conflict which should have near universal interest to those working in the capital budging area. This paper offers alternative methods for obtaining consistent IRR and NPV rankings which can be used to improve investment ranking decisions. The particular method used should depend on the decision environment. Guides for choosing the appropriate ranking method are described in the paper.

Significant decisions, projects, and investments are evaluated using either IRR or NPV methods. This paper shows that existing evaluation methods can lead to sub-optimal investment choices and provides an improved framework that facilitates better investment choices. Lacking an understanding of the sufficient conditions for IRR and NPV consistency – means that resource allocations have been made to investments and projects that are not optimal.

To the best of the authors’ knowledge, the results are this paper have not been published nor are they available elsewhere. That said, this paper builds on important earlier work which is carefully cited and credited.

Interviews in South Korea, Taiwan, Singapore, and India indicate net present value (NPV) is not widely employed in making capital investment decisions in these newly industrialized and developing countries. It is not from lack of knowledge about net present value: rather, it is due to (1) widespread violation of the assumptions underlying NPV, (2) the high risk/high return nature of the capital investments, and (3) the decision‐making process employed in making capital investment decisions. These same three conditions exist for many capital investment decisions made by firms in developed countries. Only by abandoning the static NPV approach, building in real options, and understanding and building in the decision‐making process will further advances be made in capital budgeting decision‐making. One of the key paradigms in finance is net present value (NPV). In order to maximize value, managers should accept all positive NPV investment projects, and reject all negative NPV projects. The issue becomes more complex when uncertainty is introduced, or, as in recent years, when real options to defer, abandon, expand, etc. are incorporated into the decision‐making process [e.g., Dixit and Pindyck (1994) and Trigeorgis (1995 and 1996)]. However, with these exceptions, the state of the art in capital investment decision‐making revolves around the simple statement—take all positive NPV projects. In practice, evidence from surveys and discussions with corporate executives indicates the message taught for the last 30 years in business schools has been heard and, to a large extent, acted upon by larger U.S., Canadian, and British‐based firms. While larger firms in North America, and to a lesser extent Western Europe, generally employ the static, or traditional, NPV framework for making, or assisting in making, capital investment decisions, less is known about the decision‐making process employed by firms in other parts of the world. The question addressed in this study is: “Do firms in other parts of the world, especially in newly industrialized or developing countries in the Asia Pacific region, employ NPV for making capital investment decisions?” The purposes of this study are threefold: (1) to report the results of a series of open‐ended interviews conducted in South Korea, Taiwan, Singapore, and India about the capital investment decision‐making process employed; (2) to understand why NPV is not widely employed in making capital investment decisions in these newly industrialized and developing countries; and, most important, (3) to indicate that NPV and the capital budgeting decision‐making process need rethinking and refocusing to make them more effective—in all countries, whether developed, newly industrialized, or developing. The paper proceeds in the following manner. Section I provides an introduction to the study. In Section II the results of the interviews are presented. In Section III patterns that emerged during the interview process are presented, along with a number of specific examples of the types of capital investment decisions being considered. In Section IV the assumptions underlying NPV are examined, and then risk/return and the decision‐making process are considered. Section V contains the discussion and conclusions.

This paper explores the impact of both government subsidies and decision makers' loss-averse behavior on the determination of transportation build-operate-transfer (BOT) concession periods based on cumulative prospect theory (CPT). The prospect value of a transportation project under traffic risk can be formulated according to the value function for gains and losses and the decision weight for gains and losses. As an extra income for investors, government subsidy is designed for highly risky aspects of BOT transportation projects: uncertain initial traffic volumes and fluctuating growth rates.

A decision-making model determining the concession period of a transportation BOT project is proposed by using the Monte-Carlo simulation method based on CPT, and the effects of risky behaviors of private investors on concession period decision making are analyzed. A subsidy method related to the internal rate-of-return (IRR) corresponding to a specific initial traffic volume and growth rate is proposed. The case of an actual BOT highway project is examined to illustrate how the method proposed can be used to determine the concession period of a transportation BOT project considering decision makers' loss-averse behavior and government subsidy. Contingency analysis is discussed to cope with possible misestimating of key factors such as initial traffic volume and cost coefficients. Sensitivity analysis is employed to investigate the impact of CPT parameters on the concession period decisions. An actual BOT case which failed to attract private capital is introduced to show the practical application. The results are then interpreted to conclude this paper.

Based on comparisons drawn between a concession period decision-making model considering the psychological behaviors of decision makers and a model not considering them, the authors conclude that the concession period based on CPT is distinctly different from that of the loss-neutral model. The concession period based on CPT is longer than the loss-neutral concession period. That is, loss-averse private investors tend to ask for long concession periods to make up for losses they will face in the future. Government subsidies serve as extra income for investors, allowing appointed profits to be secured sooner. For the benefit side of contingency variables, the normal state of initial traffic volume, average annual traffic growth rate and bias degree and the government subsidy need to be paid close attention during the project life span. For the cost side of contingency variables, the annual operating cost variable has a significant impact on the length of predicted concession period, while the large-scale cost variable has minor impact.

With an actual BOT highway project, the determination of transportation BOT concession periods based on the psychological behaviors of decision makers is analyzed in this paper. As the psychological behaviors of decision makers heavily impact the decision-making process, the authors analyze their impacts on concession period decision making. Government subsidy is specifically designed for various states of initial traffic volume and fluctuating growth rates to cope with corresponding high risks and mitigate private investors' loss-averse behaviors. Contingency analysis and sensitivity analysis are discussed as the estimated values of parameters may not be authentic in actual situations.

In investment decision making, the net present value (NPV) rule is often used alongside the well‐known capital asset pricing model (CAPM). In particular, the use of disequilibrium NPV is endorsed in corporate finance for both valuation and decision. The purpose of this paper is to test the reliability of this approach to capital budgeting valuations and decisions.

The use of disequilibrium values for computing a project's NPV is considered, and the consistency with the CAPM is checked. The resulting valuation and decision are contrasted with the no‐arbitrage principle, which is universally considered a benchmark for rationality.

The paper finds that the disequilibrium NPV is logically deducted from the CAPM for decision‐making purposes. However, this NPV provides nonadditive values, which makes it inconsistent with the no‐arbitrage principle.

The use of the CAPM+NPV procedure for valuing projects is invalid if disequilibrium values are used. Its use for decision making is logically valid but practically unsafe, because decision makers may frame equivalent courses of action in different ways, resulting in different decisions, which implies that they may incur arbitrage losses.

The literature does not distinguish between equilibrium and disequilibrium NPV nor between valuation and decision. This paper explicitly makes this distinction and the resulting consequences are highlighted.