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Evaluating capital investment projects
Author(s) -
BenHorim Moshe,
Sivakumar Narayanaswamy
Publication year - 1988
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090090402
Subject(s) - disequilibrium , economics , investment (military) , capital budgeting , capital (architecture) , econometrics , capital asset pricing model , actuarial science , microeconomics , medicine , history , archaeology , politics , project appraisal , political science , law , ophthalmology
The risk‐adjusted discount rate method for evaluating capital investment projects applies the risk‐adjusted rate to equilibrium as well as disequilibrium expected returns, leading to biased NPV calculations. This paper uses the CAPM framework, and suggests a procedure for applying the risk‐adjusted rate without causing a bias. The procedure is shown to result in NPVs identical to those obtained by the certainty equivalent approach. A comparison with a previously suggested procedure is also provided.