Capital Budgeting, Investment Project Valuation and Financing Mix : Methodological Proposals
Résumé
The results presented here are part of research work originally based on the problem
concerning the valuation of investment projects subject to specific fiscal rules, such as
those encountered in the upstream oil industry. More precisely, the first question addressed
was how to determine the economic value of an investment project partly financed by
borrowing, when the revenue from the project is subject to a different tax rate from the one
used to calculate the discount rate, and when the loan allocated to the project is different
from the one corresponding to the target debt ratio defined by the company for this type of
projects. We propose a method which is, in fact, more general in scope. It is presented in
the first part of this article and corresponds to the adaptation of classic ATWACC
calculations. A simple answer is to add each year, to the project cash flow, an after tax
loan cost differential (negative or positive). The formulation adopted (“generalized
ATWACC method”) is independent of any consideration related to debt ratios. The
second question addressed here is the use of the Arditti-Levy (BTWACC) method, the one
most commonly used in the Exploration-Production branch of the oil industry. While the
method is appropriate to deal with for complex specific tax rates, it needs to be adjusted if
the company allocates to a project a loan representing proportionally more (or less) than
the fraction corresponding to its consolidated debt ratio. A suitable approach is developed
here. However the formulation, by further complicating a method which in any case
cannot be used without precaution, does not possess the simplicity of that of the
generalized ATWACC method, and the latter should therefore be preferred in all
situations.
Domaines
Economies et finances
Origine : Fichiers produits par l'(les) auteur(s)
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