DISCOUNT RATE VALUE AND CASH FLOW DEFINITION: A NEW RELATIONSHIP AND ITS IMPLICATIONS |
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Authors: | AXEL PIERRU ELISABETH FEUILLET-MIDRIER |
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Institution: | IFP School , FRANCE |
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Abstract: | This article uses different standpoints to approach the question of the consistency of project valuation methods. It shows that the NPV of a project can be obtained by discounting adjusted operating cash flows at a different rate from the risk-adjusted discount rate which should normally be used. Each of the conventional project valuation methods (standard WACC, equity residual, Arditti-Levy, APV) accordingly corresponds to a specific choice of the discount rate. Thus the convergence of these methods is obvious when the risk-adjusted discount rate integrates a debt ratio equal to the one of the project. Moreover, we obtain the Modigliani-Miller relationship generalized to the case of a project of any duration. |
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