 Capital budgeting: a “general equilibrium” analysisBradford Cornell
Journal of Financial Perspectives, 2015, vol. 3, issue 1, 225-232 Abstract: As presented in leading corporate finance textbooks, the predominant method for making capital budgeting decisions is discounted cash flow analysis. The primary benefit of this approach is that it allows for different discount rates to be used for different projects. In this paper, I argue that this alleged benefit is, in fact, a detriment for two reasons. First, the betas that determine the differing discount rates are not only measured with significant error, but tend to drift substantially over the life of typical capital budgeting projects. Second, introducing differential discount rates is likely to conflict with other “general equilibrium” management objectives related to developing a successful corporate culture that promotes collaboration and innovation. This explains why many companies, particularly companies that have a large number of growth options, choose alternatives to discounted cash flow, such as the internal rate of return. Keywords: Capital budgeting; discount rates (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ris:jofipe:0066 Access Statistics for this article Journal of Financial Perspectives is currently edited by Ms Alina Stefan More articles in Journal of Financial Perspectives from EY Global FS Institute 1 More London Place, London SE1 2AF, UK. |
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