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Valuation of investment projects by an international oil company: a new proof of a straightforward, rigorous method

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  • Axel Pierru
  • Denis Babusiaux

Abstract

The problem studied is that of valuing investment projects of an international oil company subject to tax schemes that vary from one country to another. The existing disparities in the tax treatment of interest paid can lead the firm to seek an optimal allocation of its debt capacity among the various projects. In this context, the generalised ATWACC (After-Tax Weighted Average Cost of Capital) method presents numerous advantages over standard methods and is particularly well suited to the valuation of oil-field development projects where debt financing differs from the amount that would correspond to the debt ratio targeted by the firm at the corporate scale. In this paper, we discuss adapting the generalised ATWACC method to the specificities of the oil industry and offer new proof of its validity based on a model that maximises, under constraints, the firm's equity value. Copyright 2008 The Authors. Journal compilation 2008 Organization of the Petroleum Exporting Countries.

Suggested Citation

  • Axel Pierru & Denis Babusiaux, 2008. "Valuation of investment projects by an international oil company: a new proof of a straightforward, rigorous method," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 32(3), pages 197-214, September.
    • Handle: RePEc:bla:opecrv:v:32:y:2008:i:3:p:197-214
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    References listed on IDEAS

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    1. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
    2. Babusiaux, Denis & Pierru, Axel, 2001. "Capital budgeting, investment project valuation and financing mix: Methodological proposals," European Journal of Operational Research, Elsevier, vol. 135(2), pages 326-337, December.
    3. Denis Babusiaux & Axel Pierru, 2001. "De la solution d'un problème concret (projet d'investissement soumis à une fiscalité spécifique) à une avancée théorique (unicité des méthodes de calcul de Valeurs actuelles)," Revue économique, Presses de Sciences-Po, vol. 52(3), pages 717-727.
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    Cited by:

    1. Pierru, Axel, 2009. ""The weighted average cost of capital is not quite right": A rejoinder," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1481-1484, November.
    2. Lund, Diderik, 2009. "Marginal versus Average Beta of Equity under Corporate Taxation," Memorandum 12/2009, Oslo University, Department of Economics.

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