Home  Journals  Finance and Credit  37(613) - 2014 October

Developing a corporate investment program under conditions of limited information on future reinvestment opportunities

Available online: 9 October 2014

Subject Heading: Investment potential

JEL Classification: 

Pages: 2-10

The work describes a method of developing a corporate investment program under conditions of limited information on future reinvestment opportunities. The authors show that the renowned Dean method may not produce a final result in the form of the best program due to the problem of circling, which is popular in the financial literature. A serious disadvantage of the Dean's solution is the inclusion of projects into a program on a stand-alone basis. This does not allow assessing the resulting effectiveness of the entire pipeline of projects. To resolve this problem, the authors suggest using the following criteria: overall profitability index, modified index of overall profitability, index of overall profitability of equivalent annuities. The last of the three indices is the most appropriate for evaluating the effectiveness of the pipeline of projects, though other indexes also contain additional useful information for investors. The most significant result of the three indices is that they enable to test the Dean's solution with sufficient reliability at the first iteration after its receipt. In addition, the proposed indexes contain more information about the most optimal program for investors depending on their purpose: whether to invest to maximum effect or effectively implement the maximum number of projects. Thus, the authors solve the problem of circling in the Dean's solution, it becomes possible to structure more profitable investments and choose the most effective options of maximum diversification of investment risk.

Keywords: investment, program, corporation, portfolio, pipeline, project, Dean's solution, index method

References:

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