Advanced Search
MyIDEAS: Login to save this article or follow this journal

Errors in estimation of cost of capital in investment appraisal and their significance

Contents:

Author Info

  • Tomasz Wisniewski

    ()
    (Wydzial Nauk Ekonomicznych i Zarzadzania, Uniwersytet Szczecinski, Poland)

Registered author(s):

    Abstract

    In order to check out the significance of errors in the estimation of capital cost in investment appraisal, the simulation experiment has been presented in the paper. On the basis of the simulated development of the comparable firms, we have compared the end values of two simulated companies. Both companies encountered the same investment projects but they assess them differently – one firm with the proper cost of capital and the other with the cost of capital two times higher than it should use. The difference between the end value of such companies were not significant for firms which encounter many profitable investment projects (difference of only 3.3% in the company value after 25 years) and slightly higher for the companies which encounter more projects whose value is positive but is only slightly higher than zero (difference of 39.3% in the company value). Therefore, the significance of proper cost of capital estimation is more important for bigger firms in older economy segments which encounter lack of many highly profitable projects. This outcome is consistent with the pattern of use of advanced investment appraisal methods observed in the practice.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.ioz.pwr.wroc.pl/boid/artykuly/3-2008/art-8-wisniewski.pdf
    Download Restriction: no

    Bibliographic Info

    Article provided by Wroclaw University of Technology, Institute of Organization and Management in its journal Operations Research and Decisions.

    Volume (Year): 3 (2008)
    Issue (Month): ()
    Pages: 107-116

    as in new window
    Handle: RePEc:wut:journl:v:3:y:2008:p:107-116

    Contact details of provider:
    Email:
    Web page: http://www.ioz.pwr.wroc.pl/
    More information through EDIRC

    Related research

    Keywords: estimation of cost of capital; investment appraisal;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:wut:journl:v:3:y:2008:p:107-116. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Piotr Wawrzynowski).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.