Separation and capital budgeting decisions

Separation and capital budgeting decisions

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Article ID: iaor19972248
Country: Germany
Volume: 19
Issue: 1
Start Page Number: 55
End Page Number: 65
Publication Date: Jan 1997
Journal: OR Spektrum
Authors:
Abstract:

The paper proves conditions for a Fisher-separation in an imperfect capital market. If the investor has a decreasing exchange rate in consumption it is shown that two conditions are sufficient to imply separation. The first condition requires that in a certain range there is only one price (interest rate) to transfer money between two time periods. The second condition requires that in the base case the interest rate for marginal financial investments is the same as for marginal debts. The paper introduces a capital budgeting method which takes advantage of this condition. An interesting result is that a project A with a higher present value and a higher terminal value than B is not always better than B.

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