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lnvestment Project Analysis and Financing Mix. A New Method in Sight ?

Author

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  • Denis Babusiaux

    (IFPEN - IFP Energies nouvelles)

  • Jean Jaylet

    (TOTAL SA)

Abstract

Profitability studies for investment projects may use different methods to account for the manner in which the project is financed. These methods include the After Tax Weighted Average Cost of Capital (ATWACC, overnll return), the equity residual method, the ARDITTI method (Before Tax Weighted Average Cost of Capital) and the Adjusted Present Value method. The discount rates and determination of cash flow differ for each method. For ex ample, the ATW ACC calculations, which are the most commonly used, are based on operating cash f1ows that exclude debt cash flows. Return on equity calculations are based on equity cash flows that include cash flows associated with the externat financing, whereas the ARDITTI method (shadow interest) involves t.ax credits related to the deductibility of intcrest payments without reporting the credits from loans nor the corresponding principal repayments. The method described in this paper involves cash flows that, in addition to opcrating cash tlows, include the cash tlows related to the paymcnt of intercst on loans and their incidence on tax. However it does not take into eonsideration Joan cash inflows nor Joan capital repayments. The purpose of this paper is to compare this method with previous ones in order to determine the conditions required for its validation. An attempt is made to identify the possible fields of application.

Suggested Citation

  • Denis Babusiaux & Jean Jaylet, 1996. "lnvestment Project Analysis and Financing Mix. A New Method in Sight ?," Working Papers hal-02435463, HAL.
    • Handle: RePEc:hal:wpaper:hal-02435463
    Note: View the original document on HAL open archive server: https://ifp.hal.science/hal-02435463
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    References listed on IDEAS

    as
    1. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    2. Jean-Pierre Favennec & Valérie Prevot, 1991. "Raffinage et Environnement," Working Papers hal-02432585, HAL.
    3. Linke, Charles M. & Kim, Moon K., 1974. "More on the Weighted Average Cost of Capital: A Comment and Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(6), pages 1069-1080, December.
    4. Christophe Barret & Philippe Chollet, 1990. "Canadian Gas Exports : Modeling a Market in Disequilibrium," Working Papers hal-02432570, HAL.
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