Abstract
Abstract We show that when a project is financed with amortized debt, traditional capital budgeting procedures may lead to biased net present values. A model is presented, based on the seminal work of Modigliani-Miller, which allows the net present value of a project to be determined by a weighted average cost of capital that varies with the amortization process. The implications are substantial for financing arrangements such as long term loans, sinking fund debt, leasing, real estate financed by mortgages, and discount debt obligations.
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