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

WP EFMA Athens 2000

12 Pages Posted: 22 Jun 2000 Last revised: 28 May 2012

Axel Pierru

King Abdullah Petroleum Studies and Research Center (KAPSARC)

Denis Babusiaux

Institut Francais du Petrole (IFP)

Date Written: 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.

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

JEL Classification: G30, G31, G32

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: https://ssrn.com/abstract=233120 or http://dx.doi.org/10.2139/ssrn.233120

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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