EVALUATION METHODS FOR CONSTRUCTION PROJECTS

Abstract

Financial evaluation methods such as Net Present Value (NPV) and Internal Rate of Return (IRR) are not fully adequate for accounting three practical aspects of construction projects: reinvestment rate, actual amount of required investment, and firm available funds. In a certain type of projects, this inadequacy often results in the inapplicability of NPV, multiple or no IRR problem, systematic bias of IRR, and inconsistent decision signal and ranking between NPV and IRR. Many modified methods have been developed, but hardly succeeded in reflecting construction market reality in an integrated manner. To address this issue, Project Present Value, Project Rate of Return, and Firm Rate of Return are proposed together with an investment decision framework. The proposed methods are designed to be free from all those problems, while incorporating market reality in them. As a result, construction practitioners would have more reliable and economically meaningful decision tools, which lead to the success of their projects.