Computing present values: Capital budgeting done correctly

Robert Jarrow ()

Finance Research Letters, 2014, vol. 11, issue 3, 183-193

Abstract: This paper shows that the standard textbook formula for computing the present value of a future random cash flow – the discounted expected value – is formally incorrect and can generate significant errors when used to compute present values. The correct present value method is provided as well as a simple adjustment to the textbook formula which can be used to obtain an approximation to the correct value.

Keywords: Present value; No arbitrage; Capital budgeting (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 G31 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:3:p:183-193

DOI: 10.1016/j.frl.2014.05.001

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