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Determination Of Residual Value Within The Cost Benefit Analysis For The Projects Financed By The European Union

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  • Droj Laurentiu

    () (University of Oradea, Faculty of Economics)

Abstract

This paper will be later used within the Doctoral thesis: "The Mechanism of Financing Investment Projects by Usage of European Structural Funds", which is currently under development at the University Babeș Bolyai Cluj Napoca, Faculty of Economics and Business Management, under the coordination of the prof. univ. dr. Ioan Trenca. An increasing debate is rising recently between the academic community, the business community, the private lending institutions(banks, investment funds, etc.) and the officials of the Romanian Government and of the European Union regarding the proposed method for calculation of the residual value in the European financed investment projects. Several methods of calculation of the Residual Value were taken into consideration and contested by different parties in order to prepare and to submit financial analysis studies for investment projects proposed to be financed within the European Regional Development Fund(ERDF). In this context, the present paper proposes to address the three main methods of calculation of the residual value and later to study its impact over the indicators, especially over the Internal Rate of Return, obtained in the financial analysis for an investment project proposed by a Romanian medium sized company. In order to establish the proper method which should be used for selection and calculation of the residual value previously published studies and official documentations were analyzed. The main methods for calculation of the residual values were identified as being the following: A. the residual market value of fixed assets, as if it were to be sold, B. accounting economic depreciation formula and C. by using the net present value of the cash flows. Based on these methods the research model was elaborated, and using the financial data of the proposed infrastructure investment was created a case study. According to the realized study a pattern was established for proper determination of residual value and for determination of IRR and methods A and C were proposed to be used. This paper tries to analyze a specific problem of the Romanian enterprises which access European funding, so it can be further used to improve the current methodology of the ERDF programme in Romania: Sectorial Operational Programme "Increase of Economic Competitiveness".

Suggested Citation

  • Droj Laurentiu, 2011. "Determination Of Residual Value Within The Cost Benefit Analysis For The Projects Financed By The European Union," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 354-360, December.
  • Handle: RePEc:ora:journl:v:1:y:2011:i:2:p:354-360
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    File URL: http://anale.steconomiceuoradea.ro/volume/2011/n2/047.pdf
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    More about this item

    Keywords

    Cost benefit Analysis; Residual value; IRR; Investment; Structural Funds; Valuation;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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