scholarly journals Decision Making for Project Appraisal in Uncertain Environments: A Fuzzy-Possibilistic Approach of the Expanded NPV Method

Symmetry ◽  
2020 ◽  
Vol 13 (1) ◽  
pp. 27
Author(s):  
Konstantinos A. Chrysafis ◽  
Basil K. Papadopoulos
Keyword(s):  
Net Present Value ◽  
Fuzzy Numbers ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Present Value ◽  
Major Drawback ◽  
Project Appraisal ◽  
Equity Cost ◽  
Set Up ◽  
Intelligent Methods

The major drawback of the classic approaches for project appraisal is the lack of the possibility to handle change requests during the project’s life cycle. This fact incorporates the concept of uncertainty in the estimation of this investment’s worth. To resolve this issue, the authors use fuzzy numbers, possibilistic moments of fuzzy numbers and the hybrid (fuzzy statistic) fuzzy estimators’ method in order to introduce a fuzzy possibilistic version of the expanded net present value method (FPeNPV). This approach consists of two factors: the fuzzy possibilistic NPV and the fuzzy option premium. For the estimation of the fuzzy NPV, some basic assumptions are taken into consideration: (1) the opportunity cost of capital, used as the present value interest factor calculated through the weighted average cost of capital (WACC), (2) the equity cost, determined through the possibilistic set-up of the capital asset pricing model CAPM, and (3) the inflation factor, also included in the estimation of the NPV. The fuzzy estimators’ method is used for the computation of the fuzzy option premium. An algorithm of nine major steps leads to the computation of the FPeNPV. This gives the administration the opportunity to adapt to potential changes in the company’s internal and external environments. In this way, the symmetry between the planning and execution phase of a project can be reinstated. The results validate the statement that fuzzy and intelligent methods remain valuable tools to express uncertainty in various scientific areas. Finally, an illustrative example aims at a thorough comprehension of this new approach of the expanded NPV method.

A New Approach to Capital Budgeting in Closely-Held Firms and Small Firms

1981 ◽  
Vol 5 (4) ◽  
pp. 30-35 ◽  
Author(s):  
Thomas H. McInish ◽  
Ronald J. Kudla
Keyword(s):  
Small Firms ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Separation Principle ◽  
Discount Rates ◽  
Present Value ◽  
Investor Returns

The traditional application of the net present value method in capital budgeting involves the use of market derived discount rates such as the cost of capital. Justification of these discount rates stems from the separation principle that states that investment decisions can be made independent of shareholders' tastes and preferences. The purpose of this paper is to show that the separation principle does not hold for closely-held firms and small firms, and, accordingly, market-derived discount rates are inappropriate. Two capital budgeting techniques which are appropriate for these firms are presented. Accept/reject decisions for capital budgeting projects are often made using a technique known as “net present value” (NPV).1 Using the NPV method, acceptable projects are those for which the project's cost is less than the present value of the project's cash flows discounted at the firm's cost of capital; in other words, acceptable projects have a positive NPV. The firm's cost of capital is usually taken to be the weighted average of the firm's cost of equity and debt as measured by investor returns in the capital markets. Justification for use of a discount rate, determined by reference to market-wide investor returns, is based on “the separation principle” which asserts that corporations can make capital budgeting decisions independently of their shareholders' views.2 But because a critical assumption of the separation principle is that shares are readily marketable, it is likely that the separation principle and, hence, market-determined discount rates are inappropriate for closely-held firms and small firms.3 In this paper, we discuss two capital budgeting approaches which are applicable to firms whose shares are not readily marketable. This paper is divided into five sections. First, we discuss the traditional net present value approach to capital budgeting and, then, we indicate in detail, why it may not be suitable for use by closely-held firms and small firms. In the third and fourth sections, we explain two capital budgeting techniques which may be appropriate for use by these firms. Finally, we summarize our conclusions.

scholarly journals Pengembangan Model Fuzzy Project Evaluation Untuk Analisis Kelayakan Finansial Pendirian Pabrik Baru

2015 ◽  
Vol 1 (1) ◽  
pp. 22
Author(s):  
Yuniar Farida
Keyword(s):  
Discount Rate ◽  
Fuzzy Number ◽  
Average Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Project Evaluation ◽  
Triangular Fuzzy Number ◽  
Present Value

Untuk rencana pembangunan suatu pabrik baru, aspek finansial merupakan aspek terpenting dalam evaluasi kelayakannya. Dikatakan demikian, karena sekalipun aspek lain tergolong layak, jika studi aspek finansial memberikan hasil yang tidak layak, maka usulan proyek akan ditolak karena tidak memberikan manfaat ekonomi. Dalam penelitian ini Net Present Value (NPV) digunakan sebagai metode evaluasi kelayakan finansial rencana pendirian pabrik PT. X. Dalam perhitungan NPV, salah satu faktor yang krusial adalah tarif diskonto atau discount rate yang berlaku pada masa pengembalian investasi suatu proyek. NPV suatu proyek harus dihitung dengan discount rate konstan sampai masa pengembalian investasi, meski pada kenyataannya faktor – faktor yang mempengaruhi discount rate setiap tahun tidak selalu sama, akibatnya nilai NPV menjadi samar (fuzzy). Untuk mengatasi hal tersebut, maka dilakukan suatu pemodelan untuk mendekati nilai discount rate yang tepat. Dalam penelitian ini discount rate dihitung berdasarkan nilai WACC (Weighted Average Cost of Capital) yang merupakan gabungan dari struktur modal, yaitu hutang dan ekuitas. Untuk memperoleh nilai WACC yang tepat, dilakukan pendekatan dengan menggunakan Triangular Fuzzy Number (TFN). Adapun penggunaan fuzzy dilakukan karena WACC mengandung unsur ketidakpastian yang tinggi, yang bisa membuat perhitungan WACC dengan metode konvensional menjadi samar/kabur. Dari hasil perhitungan menggunakan TFN, diperoleh nilai WACC sebesar 13.64 % dan menghasilkan NPV sebesar 6,430,464,000,000. Sedangkan nilai WACC deterministik yang dihasilkan evaluator sebesar 13.72 % dan menghasilkan NPV sebesar 6,358,310,540,000

scholarly journals The weighted average cost of capital over the lifecycle of the firm: Is the overinvestment problem of mature firms intensified by a higher WACC?

2016 ◽  
Vol 12 (2) ◽  
pp. 96-103 ◽  
Author(s):  
Carlos S. Garcia ◽  
Jimmy Agustin Saravia Matus ◽  
David A. Yepes
Keyword(s):  
Corporate Governance ◽  
Literature Review ◽  
Average Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Good Reason ◽  
Weighted Average ◽  
Present Value

Firm lifecycle theory predicts that the Weighted Average Cost of Capital (WACC) will tend to fall over the lifecycle of the firm (Mueller, 2003, p. 80-81). However, given that previous research finds that corporate governance deteriorates as firms get older (Mueller and Yun, 1998; Saravia, 2014) there is good reason to suspect that the opposite could be the case, that is, that the WACC is higher for older firms. Since our literature review indicates that no direct tests to clarify this question have been carried out up till now, this paper aims to fill the gap by testing this prediction empirically. Our findings support the proposition that the WACC of younger firms is higher than that of mature firms. Thus, we find that the mature firm overinvestment problem is not intensified by a higher cost of capital, on the contrary, our results suggest that mature firms manage to invest in negative net present value projects even though they have access to cheaper capital. This finding sheds new light on the magnitude of the corporate governance problems found in mature firms.

scholarly journals A Scorecard to Detect Financial Leverage Profitability

2018 ◽  
Vol 13 (3) ◽  
pp. 244
Author(s):  
Laura Broccardo ◽  
Luisa Tibiletti ◽  
Pertti Vilpas
Keyword(s):  
Net Present Value ◽  
Economic Value ◽  
Weighted Average ◽  
Cost Of Debt ◽  
Corporate Management ◽  
External Financing ◽  
Present Value ◽  
Financial Decisions ◽  
Proposed Model ◽  
The Cost

This study investigates how balancing internal and external financing sources can create economic value. We set a financial scorecard, consisting of the Cost of Debt (COD), Return on Investment (ROI), and the Cost of Equity (COE). We show that COE should be a cap for COD and a floor for ROI in order to increase the Net Present Value at Weighted Average Cost of Capital and the Adjusted Present Value of the levered investment. However, leverage should be carefully monitored if COD and ROI go off the grid. Situations where leverage has the opposite effect on value creation and the Equity Internal Rate of Return are also discussed. Illustrative examples are given. The proposed model aims to help corporate management in financial decisions.

scholarly journals Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC

2009 ◽  
Vol 10 (6) ◽  
pp. 101-131 ◽  
Author(s):  
Ignacio Vélez-Pareja ◽  
Joseph Tham
Keyword(s):  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Cost Of Debt ◽  
Cost Of Equity ◽  
Tax Rate ◽  
Market Values ◽  
Equity Cost ◽  
Tax Payments ◽  
The Cost

Most finance textbooks present the Weighted Average Cost of Capital (WACC) calculation as: WACC = Kd×(1-T)×D% + Ke×E%, where Kd is the cost of debt before taxes, T is the tax rate, D% is the percentage of debt on total value, Ke is the cost of equity and E% is the percentage of equity on total value. All of them precise (but not with enough emphasis) that the values to calculate D% y E% are market values. Although they devote special space and thought to calculate Kd and Ke, little effort is made to the correct calculation of market values. This means that there are several points that are not sufficiently dealt with: Market values, location in time, occurrence of tax payments, WACC changes in time and the circularity in calculating WACC. The purpose of this note is to clear up these ideas, solve the circularity problem and emphasize in some ideas that usually are looked over. Also, some suggestions are presented on how to calculate, or estimate, the equity cost of capital.

scholarly journals Assessing the Option to Abandon an Investment Project by the Binomial Options Pricing Model

2016 ◽  
Vol 2016 ◽  
pp. 1-12 ◽  
Author(s):  
Salvador Cruz Rambaud ◽  
Ana María Sánchez Pérez
Keyword(s):  
Real Option ◽  
Net Present Value ◽  
Investment Project ◽  
Mathematical Expression ◽  
Options Pricing ◽  
Pricing Model ◽  
Operational Flexibility ◽  
Present Value ◽  
Project Appraisal ◽  
Financial Options

Usually, traditional methods for investment project appraisal such as the net present value (hereinafter NPV) do not incorporate in their values the operational flexibility offered by including a real option included in the project. In this paper, real options, and more specifically the option to abandon, are analysed as a complement to cash flow sequence which quantifies the project. In this way, by considering the existing analogy with financial options, a mathematical expression is derived by using the binomial options pricing model. This methodology provides the value of the option to abandon the project within one, two, and in general n periods. Therefore, this paper aims to be a useful tool in determining the value of the option to abandon according to its residual value, thus making easier the control of the uncertainty element within the project.

Usec Inc.

2017 ◽  
pp. 1-11
Author(s):  
Kenneth M. Eades ◽  
Ben Mackovjak ◽  
Lucas Doe
Keyword(s):  
Stock Price ◽  
Capital Investment ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Investment Decision ◽  
Weighted Average ◽  
Cash Flows ◽  
Primary Objective ◽  
Discounted Cash Flow ◽  
Important Input

This case is designed to present students with the challenges of formulating a discounted-cash-flow (DCF) analysis for a strategically important capital-investment decision. Analytically, the problem is representative of most corporate investment decisions, but it is particularly interesting because of the massive size of the American Centrifuge Project and the potential of the project to significantly affect the stock price. Students must determine the relevant cash flows, paying close attention to the treatment of input costs, selling prices, timing of investment outlays, depreciation, and inflation. An important input is the appropriate cost of uranium, which some students argue should be included at book value, while others argue that market value should be used. Although the primary objective of the case is to focus on the estimation of cash flows, students are provided with a straightforward set of inputs to estimate USEC's weighted average cost of capital. The case is designed for students who are learning, or need a refresher on, DCF analysis. Because of the basic issues covered, the case works well with undergraduate, MBA, and executive-education audiences. The case also affords the opportunity to explore a variety of issues related to capital-investment analysis, including relevant costs, incremental analysis, cost of capital, and sensitivity analysis. The case is an excellent example of the value of a firm as the value of assets in place plus the net present value of future growth opportunities.

scholarly journals ANALISIS KELAYAKAN USAHA COKELAT PRALINE DENGAN METODE CAPITAL BUDGETING DI TOKO KUE BAPER COKELAT PAMULANG

2020 ◽  
Vol 2 (2) ◽  
pp. 73
Author(s):  
Aod Abdul Jawad
Keyword(s):  
Net Present Value ◽  
Cost Of Capital ◽  
Capital Budgeting ◽  
Present Value

Toko Kue Baper Cokelat merupakan salah satu bentuk usaha perorangan yang salah satu produk andalannya adalah cokelat praline. Pada penelitian ini penulis membahas mengenai kelayakan usaha cokelat praline pada aspek pemasaran, teknis dan keuangan. Penulis menganalisa data keuangan toko dalam periode Januari 2018 sampai dengan Desember 2018. Metode yang digunakan adalah Capital Budgeting. Dari hasil analisa dalam periode Januari sampai dengan Desember 2018, didapat hasil usaha cokelat praline pantas dijalankan. Mengacu pada perhitungan Tingkat Pengembalian rata-rata (ARR) didapatkan nilai 132,09% lebih besar daripada tingkat cost of capital 7,37%, Net Present Value (NPV) positif bernilai Rp 216,643,572.14, Profitability Index diperoleh nilai 3,13 sesuai persyaratan harus lebih dari 1 ,Tingkat pengembalian Investasi (IRR) menghasilkan nilai 23,06% lebih besar dari tingkat suku bunga terendah 5,75%, Periode Pengembalian Investasi didapatkan hasil pengembalian dalam jangka waktu 3 tahun 2 bulan 13 hari.

B. ANALISA KELAYAKAN BISNIS PADA USAHA SWEETIN

2021 ◽  
Vol 4 (1) ◽  
pp. 11
Author(s):  
Vivi Indah Yani ◽  
Rachmat Mustofa Pratama ◽  
Izza Islami ◽  
Iman Supriadi
Keyword(s):  
Net Present Value ◽  
Cost Of Capital ◽  
Payback Period ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Internal Rate ◽  
The Cost ◽  
Business Study

Abstrak Tujuan dari penelitian ini adalah untuk menganalisis dan mendeskripsikan studi kelayakan bisnis yang dilakukan pada Kewirausahaan “Sweetin” yaitu usaha yang baru dirintis di Surabaya dalam bidang makanan (dessert). Penelitian ini menggunakan metode Net Present Value (NPV), Internal Rate of Return (IRR) dan Payback Period (PP). Hasil yang diperoleh dalam penelitian ini yaitu nilai NPV sebesar Rp. 1.910.819 > dari nol. Nilai IRR sebesar 110% > dari cost of capital 10%. Dan PP 1 bulan. Hal ini berarti kewirausahaan Sweetin ini menunjukkan bahwa secara non-finansial dan finansial layak untuk dijalankan. Kata kunci: Kelayakan Usaha, Non-Finansial, Finansial Abstract             The purpose of this research is to analyze and describe the business study conducted on “Sweetin” Entrepreneurship, a business that has just been pioneered in Surabaya in the field of food (dessert). This study uses the method of Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP). The results obtained in this study are the NPV value of Rp. 1,910,819> from zero. The IRR value is 110%> 10% of the cost of capital. And 1month PP. This means that Sweetin's entrepreneurship shows that it is non-financially and financially feasible to run. Keywords: Business Feasibility, Non-financial, Financial

scholarly journals Generalization of the Modigliani–Miller Theory for the Case of Variable Profit

Mathematics ◽  
2021 ◽  
Vol 9 (11) ◽  
pp. 1286
Author(s):  
Peter Brusov ◽  
Tatiana Filatova ◽  
Natali Orekhova ◽  
Veniamin Kulik ◽  
She-I Chang ◽  
...  
Keyword(s):  
Corporate Finance ◽  
Tilt Angle ◽  
Dividend Policy ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Discount Rates ◽  
Business Valuation ◽  
The World ◽  
Equity Cost ◽  
First Time

For the first time we have generalized the world-famous theory by Nobel Prize winners Modigliani and Miller for the case of variable profit, which significantly extends the application of the theory in practice, specifically in business valuation, ratings, corporate finance, etc. We demonstrate that all the theorems, statements and formulae of Modigliani and Miller are changed significantly. We combine theoretical and numerical (by MS Excel) considerations. The following results are obtained: (1) Discount rate for leverage company changes from the weighted average cost of capital, WACC, to WACC–g (where g is growing rate), for a financially independent company from k0 to k0–g. This means that WACC and k0 are no longer the discount rates as it takes place in case of classical Modigliani–Miller theory with constant profit. WACC grows with g, while real discount rates WACC–g and k0–g decrease with g. This leads to an increase of company capitalization with g. (2) The tilt angle of the equity cost ke(L) grows with g. This should change the dividend policy of the company, because the economically justified value of dividends is equal to equity cost. (3) A qualitatively new effect in corporate finance has been discovered: at rate g < g* the slope of the curve ke(L) turns out to be negative, which could significantly alter the principles of the company’s dividend policy.

Sign in / Sign up

Export Citation Format

Share Document