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On Algebraic Anomalies in Polynomials and Net Present Value Decisions

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Anomalies in Net Present Value, Returns and Polynomials, and Regret Theory in Decision-Making

Abstract

Investment Decision Analysis using NPV has become the primary method of investment evaluation. This chapter contributes to the existing literature by: (1) simulating and proving new biases and errors inherent in the NPV-MIRR model; (2) developing the necessary and sufficient conditions for monotonic NPV (“well behaved” NPV); (3) developing the necessary and sufficient conditions for the anomalous behavior of NPV; (4) explaining the conditions under which discount rates can be negative (less than zero); (5) developing the conditions under which negative discount rates are justified; (6) proving that the power rule and the inverse function rule in differential calculus, are both wrong. NPV, modified-IRR (MIRR) and related approaches are deeply flawed and are very sensitive to the time horizon, the signs of the periodic cash flows, and discount rates that exceed 100% or are below −100%. The NPV-MIRR model does not accommodate the differences between compounded interest rates and simple interest rates and does not account for Real Options, Regret, or Rejoice in decision-making.

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Authors and Affiliations

  1. Enugu, Nigeria

    Michael C. I. Nwogugu

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  1. Michael C. I. Nwogugu
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Nwogugu, M.C.I. (2016). On Algebraic Anomalies in Polynomials and Net Present Value Decisions. In: Anomalies in Net Present Value, Returns and Polynomials, and Regret Theory in Decision-Making . Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-44698-5_7

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  • DOI: https://doi.org/10.1057/978-1-137-44698-5_7

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  • Publisher Name: Palgrave Macmillan, London

  • Print ISBN: 978-1-137-44697-8

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