Capital Budgeting and Shareholders’ Value: Investment Projects Versus Courses of Action

Bosch‐Badia, Maria Teresa; Montllor-Serrats, Joan; Tarrazon-Rodon, Maria-Antonia

doi:10.1080/0013791x.2014.910719

Cited by 2 publications

(3 citation statements)

References 16 publications

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“…Economic AIRR (EAIRR). Another relevant AIRR is the economic AIRR, based on market values (Magni 2013, 2014, Barry and Robison 2014, Bosch-Badia et al 2014.…”

Section: Declining-balance Depreciationmentioning

confidence: 99%

Investment decisions and sensitivity analysis: NPV-consistency of rates of return

Marchioni

Magni

2018

European Journal of Operational Research

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Investment decisions may be evaluated via several different metrics/criteria, which are functions of a vector of value drivers. The economic significance and the reliability of a metric depend on its compatibility with the Net Present Value (NPV). Traditionally, a metric is said to be NPV-consistent if it is coherent with NPV in signalling value creation. This paper makes use of Sensitivity Analysis (SA) for measuring coherence between rates of return and NPV. In particular, it introduces a new, stronger definition of NPV-consistency that takes into account the influence of value drivers on the metric output. A metric is strongly NPV-consistent if it signals value creation and the ranking of the value drivers in terms of impact on the output is the same as that provided by the NPV. The degree of (in)coherence is calculated with Spearman's (1904) correlation coefficient and Iman and Conover's (1987) top-down coefficient. We focus on the class of AIRRs (Magni 2010, 2013) and show that the average Return On Investment (ROI) enjoys strong NPV-consistency under several (possibly all) methods of Sensitivity Analysis.

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“…Economic AIRR (EAIRR). Another relevant AIRR is the economic AIRR, based on market values (Magni 2013, 2014, Barry and Robison 2014, Bosch-Badia et al 2014.…”

Section: Declining-balance Depreciationmentioning

confidence: 99%

Investment decisions and sensitivity analysis: NPV-consistency of rates of return

Marchioni

Magni

2018

European Journal of Operational Research

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“…For example, as seen in section 8, book-value depreciation (and, therefore, AROA) seems to be compelling for capital investments, corporate projects, project financing transactions, where pro forma financial statements are available (see Magni 2013a, Bosch-Badia et al 2014, Magni 2015a, Mørch et al 2016 or for capturing a firm's economic profitability in a given interval of time (see also Peasnell 2012, 2015), for which accounting data are often available. In these cases, the use of the IRR is erroneous, for it is associated with a depreciation class [ ] which negates the depreciation class [ ] which has been used for deriving the prospective cash flows.…”

Section: Insights For Future Research (Iii)mentioning

confidence: 99%

“…It is also useful when no explicit information is available on the capital stream and only cash flows are available (e.g., Magni 2013a; Magni 2014a; Barry and Robison, 2014, Bosch-Badia et al, 2014, Jiang 2017 or when goal congruence is an issue for managerial performance evaluation (Lindblom and Sjögren, 2009). …”

Section: Insights For Future Research (Iii)mentioning

confidence: 99%

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Magni

2016

Journal of Mathematical Economics

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Abstract. This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPVconsistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rate-of-return notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project's cash-flow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project's capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domainspecific and purpose-specific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.

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Capital Budgeting and Shareholders’ Value: Investment Projects Versus Courses of Action

Cited by 2 publications

References 16 publications

Investment decisions and sensitivity analysis: NPV-consistency of rates of return

Investment decisions and sensitivity analysis: NPV-consistency of rates of return

Capital depreciation and the underdetermination of rate of return: A unifying perspective

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