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Capital Budgeting, Investment Project Valuation and Financing Mix: Methodological Proposals

European Journal of Operational Research, Vol. 135, pp. 326-337, 2001

Posted: 8 Dec 2009  

Denis Babusiaux

Institut Francais du Petrole (IFP)

Axel Pierru

King Abdullah Petroleum Studies and Research Center (KAPSARC)

Date Written: December 7, 2009

Abstract

A firm using a discount rate defined at the corporate scale as a Weighted Average Cost of Capital (WACC) may have to value projects subject to a different tax rate from the one used to calculate its discount rate. Moreover, to determine the economic value of a project, the WACC and Arditti-Levy methods need to be adjusted if the firm allocates to this project a loan representing proportionally more (or less) than the fraction corresponding to the target debt ratio defined by the firm for projects in the same class of risk. We first propose a method which corresponds to the adjustment of standard WACC calculations. The formulation adopted (“generalized ATWACC method”) has the advantage of being independent of any consideration related to debt ratios. We then develop a consistent adaptation of the Arditti-Levy method (“adapted BTWACC method”), but it does not possess the simplicity of that of the generalized ATWACC method.

Keywords: interest tax shields, WACC, debt allocation, debt ratio, NPV

JEL Classification: G31, G32, C61

Suggested Citation

Babusiaux, Denis and Pierru, Axel, Capital Budgeting, Investment Project Valuation and Financing Mix: Methodological Proposals (December 7, 2009). European Journal of Operational Research, Vol. 135, pp. 326-337, 2001. Available at SSRN: https://ssrn.com/abstract=1519815

Denis Babusiaux (Contact Author)

Institut Francais du Petrole (IFP) ( email )

228 Avenue Napoleon Bonaparte
Rueil Malmaison 92852
France
33147526280 (Phone)
33147527066 (Fax)

Axel Pierru

King Abdullah Petroleum Studies and Research Center (KAPSARC) ( email )

Riyadh, Central Province
Saudi Arabia

HOME PAGE: http://www.kapsarc.org/

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