Innovative Investment Models with Debt Repayment at the End of the Project

Abstract

AbstractNew modern investment models are created that are as close as possible to real investment conditions. We consider the long-term as well as arbitrary duration models with payments of interest on debt and of tax on income a few times per year (semiannually, quarterly, monthly), which could be applied in real economic practice. Their verification will lead to the creation of a comprehensive system of adequate and correct assessment of the effectiveness of the company’s investment program and its investment strategy. One of the most important elements of calculating the effectiveness of investment projects is the assessment of the discount rate, the calculation methods of which are generalized for the real conditions of the implementation of investment projects. We consider the effectiveness of the investment project from two points of view: the equity owners and the owners of equity and debt. NPV for each of these cases is calculated by two different methods: with the separation of credit and investment flows (and thus discounting of the flows using two different rates) and without such separation (with discounted of both flows using the same rate, and WACC can be chosen as rate). Numerical calculations, conducted for four investment models (without flow separation) show, that: (1) in case of considering of the effectiveness of investment project for owners of equity capital, the increase of number of payments of tax on income and of interest on debt p leads to decrease of NPV: this means that the effectiveness of investment project decreases with p; (2) in case of considering of the effectiveness of investment project for owners of equity and debt capital, the increase of number of payments of tax on income and of interest on debt p leads to increase of NPV: this means that the effectiveness of investment project increases with p. In the former case, companies should pay tax on profit and interest on debt once per year, while in the latter case, more frequent payments are profitable for the effectiveness of investment. Eight innovative investment models created in this paper can assist decision-makers in the optimal design, planning, and control in company investments and development of company investment strategy.KeywordsInnovative investment modelsEffectiveness of the investment projectFrequent payments of interest on debt and of tax on incomeThe Modigliani–Miller theoryThe Brusov–Filatova–Orekhova theory