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Capital Budgeting and Shareholders’ Value: Investment Projects Versus Courses of Action

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  • Maria Teresa Bosch-Badia
  • Joan Montllor-Serrats
  • Maria Antonia Tarrazon-Rodon

Abstract

The relevance of corporate investment decisions lies in their impact on shareholder wealth. It not only depends on the investment project but also on the corporate dynamics that turns it into the sequence of shareholders’ capital contributions, dividends, and gross terminal value that constitutes the shareholders’ investment project (SIP). We develop a model to calculate the SIP cash flows and the values of its interim capitals following the average internal rate of return (AIRR) paradigm. The shareholders’ final value depends on two reinvestment rates that, respectively, capture the returns obtained by the retained cash flows and the dividends reinvested by shareholders. On this basis, we approach the analysis of value creation combining both reinvestment rates in the shareholders’ net present value (SNPV). This model enables us to obtain the AIRR of the SIP and a variant of it, the equity growth rate that embeds the impact of internal and external reinvestment on the shareholders’ final value.

Suggested Citation

  • Maria Teresa Bosch-Badia & Joan Montllor-Serrats & Maria Antonia Tarrazon-Rodon, 2014. "Capital Budgeting and Shareholders’ Value: Investment Projects Versus Courses of Action," The Engineering Economist, Taylor & Francis Journals, vol. 59(3), pages 207-230, July.
    • Handle: RePEc:taf:uteexx:v:59:y:2014:i:3:p:207-230
    DOI: 10.1080/0013791X.2014.910719
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    Cited by:

    1. Magni, Carlo Alberto, 2016. "Capital depreciation and the underdetermination of rate of return: A unifying perspective," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 54-79.
    2. Marchioni, Andrea & Magni, Carlo Alberto, 2018. "Investment decisions and sensitivity analysis: NPV-consistency of rates of return," European Journal of Operational Research, Elsevier, vol. 268(1), pages 361-372.

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