Does the Net Present Value as a Financial Metric Fit Investment in Green Energy Security?

Surprisingly, little is known whether the net present value (NPV) used as a financial metric in budgeting and investment planning to analyse a projects’ profitability is universal. Meanwhile, the epochal green energy revolution ensuring carbon neutrality through green innovations requires enormous investments, and projects realised must ensure energy security. Therefore, there is a need to reanalyse financial metrics used in financial planning, including NPV. We eliminate this research gap and, based on data from Poland, Romania, Hungary, Croatia, the USA, the United Kingdom, Japan, Israel, and Euro Zone, explain why one may not perceive the currently used NPV formula as a universal financial metric. We show that the variable discount rate influences the time value of money. Therefore, there is a need to redefine the NPV formula. This study makes two main contributions. First, it creates new ground by revisiting the NPV formula in the emerging market context compared to stable economies and contributes to developing business and management theory. Second, we propose and empirically verify the modified NPV formula as a financial metric that considers the situation of energy firms in emerging markets. Thus, this research helps the capital budgeting process, and the modified NPV formula can help provide optimal outcomes in firms, helping to reduce financial risks. Our study contributes to a further contextual diagnosis of business projects and can, in turn, be relevant for other energy sector analyses.

Impact of Financial Management Practices on Sustainable Growth of SMEs: A Case of Catering Organizations in Bulawayo Metropolitan Province

The study was conducted to establish the impact of financial management practices on the perdomance of SMEs in Zimbabwe. The problem statement identified lack of business growth of SMEs. The objectives of the study were to establish the impact of financial management practices on the sustainable growth of SMEs. The study was based on a sample of 101 SMEs from the Catering Industry that were selected through random sampling. Data analysis was done through SPSS version 2.2. The findings revealed that SMEs used mostly four financial management practices: capital budgeting, working capital management, Capital structure, and financial reporting analysis. The challenges faced by SMEs in implementing prudent financial management practices were mainly poor management skills, lack of business registration and lack of financial literacy skills. The results of the study implied that most challenges faced by SMEs were internally localised. The study recommended a model for growth of SMEs in which the government was the major supporter of SMES through financial literacy training and provision of financial support. SMEs were recommended to use equitable financial management practices.

Taking the highway out: exiting the stock market to maximize results

Theoretical basis The essence of discounted cash flow valuation is simple; the asset is worth the expected cash flows it will generate, discounted to the reference date for the valuation exercise (normally, the day of the calculation). A survey article was written in Parker (1968), where it was stated that the earliest interest rate tables (use to discount value to the present) dated back to 1340. Works from Boulding (1935) and Keynes (1936) derived the IRR (Internal Rate of Return) for an investment. Samuelson (1937) compared the IRR and NPV (Net Present Value) approaches, arguing that rational investors should maximize NPV and not IRR. The previously mentioned works and the publication of Joel Dean’s reference book (Dean, 1951) on capital budgeting set the basis for the widespread use of the discounted cash flow approach into all business areas, aided by developments in portfolio theory. Nowadays, probably the model with more widespread use is the FCFE/FCFF (Free Cash Flow to Equity and Free Cash Flow to Firm) model. For simplification purposes, we will focus on the FCFE model, which basically is the FCF model’s version for the potential dividends. The focus is to value the business based on its dividends (potential or real), and thus care must be taken in order not to double count cash flows (this matter was treated in this case) and to assess what use is given to that excess cash flow – if it is invested wisely, what returns will come of them, how it is accounted for, etc. (Damodaran, 2006). The bridge to the FCFF model is straightforward; the FCFF includes FCFE and added cash that is owed to debtholders. References: Parker, R.H. (1968). “Discounted Cash Flow in Historical Perspective”, Journal of Accounting Research, v6, pp58-71. Boulding, K.E. (1935). “The Theory of a Single Investment”, Quarterly Journal of Economics, v49, pp479-494. Keynes, J. M. (1936). “The General Theory of Employment”, Macmillan, London. Samuelson, P. (1937). “Some Aspects of the Pure Theory of Capital”, Quarterly Journal of Economics, v51, pp. 469–496. Dean, Joel. (1951). “Capital Budgeting”, Columbia University Press, New York. Damodaran, A. (2006). “Damodaran on Valuation”, Second Edition, John Wiley and Sons, New York. Research methodology All information is taken from public sources and with consented company interviews. Case overview/synopsis Opportunities for value creation may be found in awkward and difficult circumstances. Good strategic thinking and ability to act swiftly are usually crucial to be able to take advantage of such tough environments. Amidst a country-wide economic crisis and general disbelief, José de Mello Group (JMG) saw one of its main assets’ (Brisa Highways) market value tumble down to unforeseen figures and was forced to act on it. Brisa’s main partners were eager in overpowering JMG’s control of the company, and outside pressure from Deutsche Bank was rising, due to the use of Brisa’s shares as collateral. JMG would have to revise its strategy and see if Brisa was worth fighting for; the market implicit assessment about the company’s prospects was very penalizing, but JMG’s predictions on Brisa’s future performance indicated that this could be an investment opportunity. Would it be wise to bet against the market? Complexity academic level This study is excellent for finance and strategy courses, at both undergraduate and graduate levels. Company valuation and corporate strategy are required.

ANALISIS KELAYAKAN INVESTASI DANA HAJI UNTUK PEMBANGUNAN PROYEK INFRASTRUKTUR JALAN TOL JAKARTA - CIKAMPEK II ELEVATED

Increasing the welfare of the Indonesian people, especially Muslims, encourages religious activities that require financial readiness, namely the Hajj. The high enthusiasm of Indonesian Muslims to register is not balanced with the quota of prospective pilgrims who depart each year, making the waiting list for the pilgrimage longer. The number of recipients of prospective pilgrims continues to grow from year to year. Registrants who want to perform the Hajj until June 2018 are 3,797,376 while the annual Indonesian Hajj quota is around 210,000 people. This creates an accumulation of initial deposit funds, in March 2018 total of hajj fund Rp. 105,191,372,936,614 were collected. This study aims to assess whether the Hajj funds are worth investing in toll road infrastructure projects. Starting from identifying problems to calculating investment feasibility to cooperation agreements Management of Hajj funds with Islamic banks under musyarakah mutanaqishah agreement to investing in toll road infrastructure projects. The capital budgeting method is used to calculate the feasibility of investment, NPV value of Rp. 54,805,724,000,000, then IRR value is 62%, BCR is 3.61, and payback period is 12 years. The conclusion is Hajj fund is worth to investing in the toll road infrastructure project Jakarta - Cikampek II Elevated.

Dynamic Programs with Shared Resources and Signals: Dynamic Fluid Policies and Asymptotic Optimality

Allocating Resources Across Systems Coupled by Shared Information Many sequential decision problems involve repeatedly allocating a limited resource across subsystems that are jointly affected by randomly evolving exogenous factors. For example, in adaptive clinical trials, a decision maker needs to allocate patients to treatments in an effort to learn about the efficacy of treatments, but the number of available patients may vary randomly over time. In capital budgeting problems, firms may allocate resources to conduct R&D on new products, but funding budgets may evolve randomly. In many inventory management problems, firms need to allocate limited production capacity to satisfy uncertain demands at multiple locations, and these demands may be correlated due to vagaries in shared market conditions. In this paper, we develop a model involving “shared resources and signals” that captures these and potentially many other applications. The framework is naturally described as a stochastic dynamic program, but this problem is quite difficult to solve. We develop an approximation method based on a “dynamic fluid relaxation”: in this approximation, the subsystem state evolution is approximated by a deterministic fluid model, but the exogenous states (the signals) retain their stochastic evolution. We develop an algorithm for solving the dynamic fluid relaxation. We analyze the corresponding feasible policies and performance bounds from the dynamic fluid relaxation and show that these are asymptotically optimal as the number of subsystems grows large. We show that competing state-of-the-art approaches used in the literature on weakly coupled dynamic programs in general fail to provide asymptotic optimality. Finally, we illustrate the approach on the aforementioned dynamic capital budgeting and multilocation inventory management problems.

Capital budgeting practices and political risk: evidence from Lebanon

Purpose This paper aims to examine how capital investment projects are appraised in Lebanon; whether the risk is incorporated into this process by Lebanese firms and the impact of political risk on the capital budgeting process. Design/methodology/approach This paper uses a questionnaire survey to investigate the capital budgeting practices of companies located in Lebanon, which is a country characterised by a high level of political risk. Findings Lebanese companies tend to use more than one method of investment appraisal and, increasingly, they are using sophisticated discounted cashflow techniques alongside the payback period. The most widely used methods to evaluate risk include scenario and sensitivity analysis. Finally, political risk plays an important role in the capital budgeting processes of Lebanese companies. Originality/value The paper reports on whether the methods of capital investment appraisal used throughout advanced Western economies are used in the context of an emerging economy. In addition, Lebanon is an ideal research site to study capital budgeting as the conflicts in the country of the past 50 years have required sizeable new expenditure on capital projects; the country is characterised by high levels of political risk which may lead corporate managers to use different approaches to investment appraisal and it provides an opportunity to study capital budgeting decisions by private, unlisted firms.

How an idiosyncratic (zero-beta) risk can greatly increase the firm’s cost of capital

The celebrated capital asset pricing model (‘CAPM’) brought numerous appealing insights and spawned a new theory of capital budgeting. One key intuition is that there is ‘no penalty for diversifiable risk’ – that is, any risky payoff that has zero-correlation with the wider economy, and hence zero-beta, is treated as ‘risk-free’. Does that mean that managers can bet the firm on a spin of the roulette wheel without attracting a higher CAPM discount rate? Our re-interpretation of CAPM reveals that potential financial losses which are conventionally regarded as firm-specific ‘unpriced’ risks can bring a large increase in the firm’s beta and CAPM cost of capital, despite having zero-beta and making only negligible difference at the aggregate market level. This mathematical result clashes with textbook expositions but is easily demonstrated and can be traced to authoritative but overlooked parts of the theoretical CAPM literature. JEL Classification: G11, G12