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Investment Decision Rules

In: Corporate Finance for Long-Term Value

Author

Listed:
  • Dirk Schoenmaker

    (Erasmus University Rotterdam)

  • Willem Schramade

    (Nyenrode Business University)

Abstract

When making investment decisions, companies need to be able to compare various investment opportunities. Which ones offer the best value? The first sections of this chapter describe how companies can make such comparisons on a purely financial basis, using the basic investment decision rules of payback period; internal rate of return (IRR); discounted cash flow (DCF); or net present value (NPV) to calculate financial value (FV). We then dive deeper in the calculation of social value (SV) and environmental value (EV). Even with these values known, the big question remains: how to balance them? What decision rules should be followed? We present three approaches to combining NPV with social (S) and environmental (E) factors: (1) the constrained PV (with S & E as a budget); (2) the expanded PV (with SV & EV in monetary values); and (3) the integrated PV (with SV & EV explicitly balanced). In all three approaches F, S, and E all weigh in and can be prioritised—ideally informed by the company’s purpose and value creation profile.

Suggested Citation

  • Dirk Schoenmaker & Willem Schramade, 2023. "Investment Decision Rules," Springer Texts in Business and Economics, in: Corporate Finance for Long-Term Value, chapter 6, pages 145-171, Springer.
    • Handle: RePEc:spr:sptchp:978-3-031-35009-2_6
    DOI: 10.1007/978-3-031-35009-2_6
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