Diminishment Index for Considering Concurrently Project's Feasibility and Financial Structure

摘要

Feasibility analyses of large development projects have been mainly concerned with Indexes such as IRR & NPV based on the cash flow statement and B/C ratio, ignoring the return structure of projects or the cost structure of projects. Knowing cost and return structure is important when investors consider feasible projects. This paper uses the principles of index to address an important question: given feasible projects, how should an investor decide whether the project matches his/her investment purpose? As such, the goal of this technical note is to propose the diminishment index (DI) consisting of the cost to equity ratio, the liability on return (NPV on this paper) ratio, and the equity to liability ratio in order to estimate the return structure of projects and the cost structure of projects. The results indicated that the DI had best described which project among feasible projects satisfying the requirements of NPV > 0 and IRR > required rate of return should be first rejected. The DI noted the order of diminishing a probability selected among feasible projects and the financial structure of projects. Eventually, a player can select a more appropriate project, where considering concurrently profitability of the project and the investment purpose of the player by the DI. Further, players can simulate variability in cost, equity, liability, and NPV of the DI.