Capital Investment Evaluation Research Articles

Incorporating Uncertainty in the Economic Evaluation of Capital Investments for Water-Use Efficiency Improvements

David Adamson, Senior Research Fellow Centre for Global Food and Resources, University of Adelaide, Australia; david.adamson{at}adelaide.edu.au

Incorporating Uncertainty in the Economic Evaluation of Capital Investments for Water-Use Efficiency Improvements

Incorporating Uncertainty in the Economic Evaluation of Capital Investments for Water-Use Efficiency Improvements

Three Corporate Finance Practices in Pakistan: A Review of Previous Studies and Way Forward

This study reviews the empirical studies arranged on Pakistani capital market and specifies the pattern of three corporate finance practices. The subject of corporate finance discusses the various activities performed at firm level such as capital budgeting, capital structure, and dividend payout policy. The capital budgeting technique consists of six methods i.e., net present value, discounted cash flow, payback period, and internal rate of return etc. but Pakistani firms often interested in net present value and internal rate of return for capital investment evaluation. Similarly, the capital structure decision carries the debate on two options of financing i.e., debt financing and equity financing but literature shows that the Pakistani firms generally follow the pecking order theory and prefer more debt financing. Similarly, as for concern dividend payout policy, literature discusses the different theories and determinants but still unable to generalize the dividend payout trend specifically in Pakistani context. Corporate managers and policymakers can use the conclusion for strategic purposes.

Evaluation of capital investments in energy equipment of a power plant by a power function

The paper proposes the use of a power function for evaluating capital investments in the main and auxiliary equipment of a power plant as a universal method for solving a wide range of applied and research problems. This approach allows assessing investments, based on the technical specification of the power plant such as parameters of working fluid, the climatic zone of operation, the type of equipment, type of fuel, etc.

Determinants of payout policy and investment attractiveness of companies listed on the Warsaw Stock Exchange

Research background: Making decisions concerning the payout policy depends on many diversified neoclassical and behavioral determinants. Although these factors are well-described in the literature, there is still a research gap concerning the lack of a comprehensive impact model of payout policy determinants on the investment attractiveness of shares.
 Purpose of the article: The aim of this paper is to present the diverse nature of the relation-ship between different forms of cash transfer to the shareholders and in-vestments attrac-tiveness of public companies in the context of various determinants of payout policy. The possibility of achieving this objective was conditioned by the empirical verification of research hypothesis stating that the diversify of payout forms is accompanied by the different determinants of payout policy that condition an effective investment of stock investors? capital.
 Methods: The empirical research was conducted among the electromechanical companies listed on the Warsaw Stock Exchange in the years 2006-2015. The data for analysis were obtained from Notoria Service database and Stock Exchange Yearbooks. The calculations were carried out using the methodology of taxonomic measure of investment attractiveness, as well as dividend premium and share repurchase premium.
 Findings & Value added: The final conclusion of our research is that the companies con-ducting the payout policy in different forms of cash transfer differ in terms of many charac-teristics, such as: financial standing, market value, ownership structure, company?s size and age. Moreover, their investment attractiveness differs according to regularity of payment, stock exchange situation and shareholders? preferences. The value added of this paper is a new approach to the evaluation of capital investment with a special emphasis on the determinants of payout policy.

Die lewensvatbaarheid van boerbokboerdery: 'n Vergelykende gevallestudie

The aim of this study was to design a case study where a number of management accounting evaluation techniques, namely performance measurement (short-term focus), capital investment evaluation (long-term focus) and risk, have been identified to compare the financial results of different scenarios between Boer goat, mutton breeds and beef cattle farming. The contribution of the study is that it simplifies the decision-making regarding the choice between the types of red meat farming used for different scenarios, namely farm size and available capital. Compliant software that have been developed, allow the user to compile unique scenarios and make decisions according to that. The value of this should be determined by taking into account that there are, as for other livestock types in South Africa, no readily available market indicators for the Boer goat currently. This deficiency leads to price uncertainty that makes it difficult to determine the value of the Boer goat industry.

Diamond Chemicals Plc (a): The Merseyside Project

These two cases consider the capital investment decisions to be made by executives of this large chemicals firm in January 2001. The A case presents a go/no-go project evaluation regarding improvements to a polypropylene production plant. The B case reviews the same project but from one level higher, where the executive faces an either/or investment decision between two mutually exclusive projects. The objective of the two cases is to expose students to a wide range of capital-budgeting issues which includes, among others, the identification of relevant cash flows, the critical assessment of a capital investment evaluation system, the classic “cross-over” problem, in which project rankings disagree on the basis of net present value (NPV) and internal rate of return (IRR), and the assessment of real option value latent in managerial flexibility to change operating technologies. Excerpt UVA-F-1351 Rev. Apr. 30, 2015 Diamond Chemicals PLC (A): The Merseyside Project Late one afternoon in January 2001, Frank Greystock told Lucy Morris, “No one seems satisfied with the analysis so far, but the suggested changes could kill the project. If solid projects like this can’t swim past the corporate piranhas, the company will never modernize.” Morris was plant manager of Diamond Chemicals PLC’s Merseyside Works in Liverpool, England. Greystock, Diamond’s controller, was referring to a capital project that Morris wanted to propose to senior management. The project consisted of a GBP9 million expenditure to renovate and rationalize the polypropylene production line at the Merseyside plant to make up for deferred maintenance and exploit opportunities to achieve increased production efficiency. Diamond Chemicals was under pressure from investors to improve its financial performance because of both the worldwide economic slowdown and the accumulation of the firm’s common shares by a well-known corporate raider, Sir David Benjamin. Earnings per share had fallen to GBP30.00 at the end of the year 2000 from around GBP60.00 at the end of 1999. Morris thus believed that the time was ripe to obtain funding from corporate headquarters for a modernization program for the Merseyside Works—or at least, she had believed so until Greystock presented her with several questions that had only recently surfaced. Diamond Chemicals and Polypropylene . . .

Assessing the Efficacy and Standardization Potential of Five Competing Venture Capital Investment Evaluation Approaches

The research objective behind this article was to perform a critical evaluation and comparison of five representative business plan evaluation aids (BPEAs) to facilitate constructive discussion of the proposition that greater standardization of venture capital decision-making might be both desirable and possible. The five BPEAs were systematically compared using a structured, taxonomic process. The evidence of this investigation suggests a clear superiority of BPEAs that are based on the researched attributes of successful ventures and use actuarial modeling. Discussion centered on the importance of using BPEAs in a quest for greater consistency during venture capital investment decision-making.

Valuing investment projects with expansion options

PurposeThis article proposes an evaluation of capital investments that accounts for not only the initial assets, but also any potential growth options.Design/methodology/approachUsing a piecewise linear approximation, a robust valuation technique is demonstrated for analyzing capital investment opportunities containing expansion options in a finite time horizon.FindingsThis process not only recognizes the option‐like characteristics of the initial investment opportunity, but also recognizes the option‐creating characteristics of the investment. This analysis shows that the value of capacity expansion options created by the initial investment has different dynamic characteristics from the assets in place. Although the growth options do not appear in the early investment premium, its impact on the investment decision is embedded in the investment threshold. When the time to expiration is short and the cost to delaying the assets in place is low, this analysis suggests that the initial investment decision might be made by ignoring the growth options.Originality/valueThis real option methodology provides a continuous solution to the optimal investment threshold and is a viable alternative to the traditional finite difference approach.

Do managers of South African manufacturing firms make optimal capital investment decisions?

Managing the deployment of a firm’s assets in the form of capital goods is a vital determinant of a firm’s ability to successfully compete over time. Corporate finance theory clearly prescribes a rule to ensure the optimality of these decisions: all capital investment decisions should be evaluated through the use of the net present value (NPV) rule while project specific risk should be incorporated through the adjustment of the discount rate used in the NPV analysis.This paper presents the results of a survey of the capital investment evaluation practices of South African manufacturing firms. The results indicate that the majority of firms surveyed do not use the NPV evaluation technique when making their capital investment decisions. Furthermore, those firms that do use this technique use it in combination with other, theoretically deficient (and redundant) techniques. Finally, they do not adjust for project specific risk as prescribed.

Waste-to-energy plant for paper industry sludges disposal: technical-economic study

In this work, a detailed technical-economic analysis of a fluidized bed based waste-to-energy system for disposal of paper manufacturing sludges has been carried out. Specific reference is made to a case study represented by the largest plant in Italy producing recycled paper, with a daily sludge output of about 52 t. The adopted plant has been sized for a nominal capacity of 140 t per day also allowing the progressive elimination of sludges accumulated in a previously utilized landfill, giving a nominal electrical power output of 3.5 MW. The main plant sections have been described and the adopted technical solutions have been outlined. A detailed process and equipment characterization has been carried out leading to a thorough evaluation of capital investment, operating costs and revenues. A differential analysis has been performed with respect to the alternative solution represented by the disposal of untreated sludges in an external landfill in order to highlight the savings obtainable. The economic profitability of the investment has been evaluated regarding several performance indices. The economic evaluation has been completed by a sensitivity and risk analysis in order to assess the effects of uncertainties in the economically significant parameters. Adopting most probable values, the savings obtained with the considered waste-to-energy system are evaluated in the 15–20 million Euro range during the estimated plant life of 15 years with a foreseen pay back time of 4 years. Moreover, many environmental benefits result such as the remediation of existing landfill, the avoidance of new landfills opening and very low air pollutants emissions.

Developments of the payback method

In spite of its theoretical deficiencies, the payback (PB) method is commonly used for appraisals of capital investments in companies. Sometimes the method is used when aspects such as liquidity and project time risk are focused, but it is also commonly used in pure profit evaluations as a single criterion. The two main deficiencies of the PB method are that it does not measure the time value of money in a correct manner and that it ignores cash flows after the payback period (PP). These deficiencies can be reduced if the maximum acceptable PP is chosen in a somewhat more sophisticated way. In practice the maximum acceptable PP is often chosen as a fixed value, e.g., three years. In some cases the limit value of the PP has been related to the economic life of the investment, e.g., a PP shorter than half the economic life. If these two rules of thumb are combined, a more theoretically correct evaluation of investments can be achieved. Such a combined PB method is based on the assumption of constant yearly cash flows. However, the method can be developed to handle cases with varying cash flows, but then some of its simplicity is lost. Due to the fact that the decision situations in the evaluation of capital investments typically are uncertain concerning the time pattern and the duration of the cash flows, this can justify the use of a simple but more robust PB method even if there would be time for more advanced analyses.

Quantitative reliability analysis of distribution systems: repair times

This article analyses the impact of repair times on the performance of the distribution network in an isolated rural community using the eaNSF program which was developed specifically to aid in the economic and strategic evaluation of capital investment and technical developments in distribution networks. The study investigates the impact on system availability caused by changing the repair times. The sensitivity of the results is evaluated for a range of networks with similar characteristics and varying reliability data.

Past and Present Methods of Manufacturing Investment Evaluation: A Review of the Empirical and Theoretical Literature

Abstract Abstract As early as the 1950's, capital budgeting processes based on discounted cash flow served as the principal tools for evaluating capital investment proposals for American firms. Buffeted during the late 1970's and 1980's by overseas competition, American firms, supported by innovative researchers, reconsidered capital investment evaluation practices. This paper briefly discusses both past and present manufacturing investment evaluation methods.

The Alignment Of Management Accounting With Manufacturing Priorities: A Strategic Perspective

This paper proposes that traditional cost‐based management accounting systems (MAS) are inappropriate for controlling a manufacturing organisation's performance in cases where non‐cost factors are important aspects of the firm's competitive strategy. Manufacturing organisations in Australia are under increasing pressure to increase their competitiveness. This can be achieved by giving the manufacturing function strategic status in the organisation and by designing the MAS to support those strategies directly. The MAS should measure operational performance, control investment and report in terms of the factors which determine the organisation's competitive advantage, whether they be high product quality, manufacturing flexibility, low cost or other influences. The paper provides two applications of the concept of strategy‐driven management systems: capital investment evaluation systems, and operational performance measurement and reporting systems.

A forecast evaluation of capital investment in agriculture

A stochastic coefficients model developed by Swamy and Tinsley is used to forecast agricultural investment. In two sets of out-of-sample forecasts, one for 5 years, the other for 10 years, the Swamy-Tinsley stochastic coefficients model outperforms competing fixed and stochastic coefficients empirical models of agricultural investment for a wide array of risk functions. The Swamy-Tinsley stochastic coefficients investment model forecasts continued declines in net investment for farm machinery, with greater declines toward the end of the forecast period. The Swamy-Tinsley method produced better predictions than both stochastic and fixed-coefficients competitors.

Base Selection for Modified Rates of Return and its Irrelevance for Optimal Project Choice

ABSTRACT “Modified” rates of return for capital investment evaluation and the issue of the type of rate base to be used there are reviewed, and it is shown that the base type recently proposed by Beaves is actually identical to one previously proposed by Lin. In any event, under certainty and a perfect capital market, it is shown that the rate base issue is irrelevant in that project selection by optimal rate of return decision rules is, inevitably, independent of the base type used. Also discussed are some potential misapplications of “modified” rates and correct means for avoiding those.

Capital investment evaluation for the multinational firm

In their profit-seeking activities, multinational corporations have global opportunities to evaluate as well as increased risks and complexities to contend with. Hence, there is a significant need for the development of robust models to handle the new dimensions faced by firms functioning in an international environment. Particularly, in capital budgeting where decisions are made regarding the long-run livelihood and performance of the firm, it is essential to analyze carefully and to reflect adequately all of the critical variables. The great number of relevant variables, their significant interrelationships, and the high degree of uncertainty render mathematical optimization models extremely complex or infeasible to solve within reasonable computer memory or time limitations. To overcome these shortcomings and to arrive at an economically rational treatment of the capital budgeting problem, a “Hertz-type” simulation model is formulated for the multinational firm. The important international variables—foreign exchange rates, foreign tax methodology, host government controls, and other social, economic and political factors—are reflected in the model. A two stage approach is utilized: first, investment projects are analyzed by the subsidiary and if they pass this first screening they are proposed for the parent's consideration; second, the parent evaluates the attractiveness of projects from its point of view and ranks proposals for acceptance considering all global opportunities. The model is designed so that sensitivity analysis can be easily performed.

Discounting Indices Proposed for Capital Investment Evaluation: A Further Examination

ABSTRACT A recent publication [2] in this journal presented a comprehensive comparison and critique of discounting indices proposed for (i) the examination of whether a proposed independent project should be accepted and (ii) selection of a project from a set of mutually exclusive projects. The present paper examines procedures available in the literature of engineering and managerial economics and in practice for selecting projects from a given number of proposed capital investment projects, if a given capital constraint does not permit the undertaking of all proposed projects. It appears that the present state of the art is subject to much controversy and confusion. The ensuing presentation intends to rectify this situation. In addition, a procedure for the above selection problem is developed. Usage of this procedure is recommended for the many policy makers who are continually faced with the trade-off between elaborate methods on the one hand and cursory /approximations on the other.

A Comprehensive Comparison and Critique of Discounting Indices Proposed For Capital Investment Evaluation

Abstract In the traditional literature of engineering and managerial economics, a variety of different and not generally consistent indices have been proposed for deciding whether a given capital investment project should be undertaken. Using mathematical programming, it is shown herein that in an unconstrained situation under certainty, with complete freedom to borrow or lend at one rate of interest, the present worth index and its equivalents are correct while indices inconsistent with present worth are wrong. However, in the presence of further constraints, e.g., on allowed borrowing or on available scarce material, even the present worth index is unsatisfactory, and, in general, a complete mathematical programming solution is required.