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

This book explores why Modified Internal Rate of Return (MIRR) and Net Present Value (NPV) are not necessarily accurate or efficient tools for valuation and decision-making. The author specifically addresses the biases and framing effects inherent in the NPV/MIRR/IRR model and in related approaches such as Adjusted Present Value (APV), Net Future Value (NFV), and by extension, Polynomials. In doing so, the book presents new ways of solving higher order polynomials using invariants and homomorphisms and explains why the “Fundamental Theorem of Algebra”, the Binomial Theorem and the “Descartes Sign Rule” are unreliable. Chapters also discuss how International Asset Pricing Theory (IAPT) and Intertemporal Capital Asset Pricing Models (ICAPM) can produce inaccurate results in certain circumstances. The conditions under which ICAPM and IAPT may be accurate are described; as well as why those conditions cannot, or are unlikely to, exist. The conditions under whichnegative interest rates may exist or are justified are also outlined. Moreover, the author explains why traditional Consumption-Savings-Investment-Production models of allocation can be inefficient, and then introduces a new model of allocation that can be applied to individuals, households and companies. Finally, the book explains why the Elasticity of Intertemporal Substitution is a flawed concept and introduces the Marginal Rate of Intertemporal Joint Substitution as a solution.

About the Author

Michael C. I. Nwogugu is an author, entrepreneur and consultant, who has held senior management and Board-of-Director positions in companies in both the US and Nigeria. Mr. Nwogugu’s articles have been published in Applied Mathematics&Computation ; Journal of Risk Finance ; International Journal of Mathematics, Game Theory&Algebra ; Discrete Mathematics, Algorithms&Applications ; Corporate Ownership&Control ; and Chaos&Complexity Letters . Mr. Nwogugu earned degrees from the University of Nigeria (Nigeria), the City University of New York (USA), and Columbia University (New York City, USA). Mr. Nwogugu’s book, Risk in the Global Real Estate Market (John Wiley, 2012), addresses various aspects of risk, mechanism design, household intertemporal allocations and constitutional economics; and introduces new and more efficient financial products.