Abstract

http://ssrn.com/abstract=233120
 
 

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Capital Budgeting and Cost of Capital: A Unique Formulation of the Main Investment Decision Methods


Axel Pierru


King Abdullah Petroleum Studies and Research Center (KAPSARC)

Denis Babusiaux


Institut Francais du Petrole (IFP)

2000

WP EFMA Athens 2000

Abstract:     
Analysts can use various methods to value an investment project including the standard weighted average cost of capital (WACC) method, the Arditti-Levy method, the equity residual method, and the Adjusted Present Value. We propose a unique formulation from which these methods can be derived. This formulation permits demonstrating the equality of their net present values and the consistency of their internal rates of return in a straightforward manner when a predetermined debt ratio is targeted. We also discuss possible pitfalls and adjustments when considering a project's financing mix.

Number of Pages in PDF File: 12

Keywords: Capital Budgeting, Cost of Capital, WACC, NPV, IRR, APV

JEL Classification: G30, G31, G32

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Date posted: June 22, 2000 ; Last revised: May 28, 2012

Suggested Citation

Pierru, Axel and Babusiaux, Denis, Capital Budgeting and Cost of Capital: A Unique Formulation of the Main Investment Decision Methods (2000). WP EFMA Athens 2000. Available at SSRN: http://ssrn.com/abstract=233120 or http://dx.doi.org/10.2139/ssrn.233120

Contact Information

Axel Pierru (Contact Author)
King Abdullah Petroleum Studies and Research Center (KAPSARC) ( email )
Riyadh, Central Province
Saudi Arabia
HOME PAGE: http://www.kapsarc.org/
Denis Babusiaux
Institut Francais du Petrole (IFP) ( email )
228 Avenue Napoleon Bonaparte
Rueil Malmaison 92852
France
33147526280 (Phone)
33147527066 (Fax)
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