Net present value, duration, and CAPM in light of investment theory: a comment on Kruk

Thomas Hering, Michael Olbrich and David J. Rapp (david.rapp@isg.fr)
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Thomas Hering: Fern University
Michael Olbrich: Universität des Saarlandes [Saarbrücken] = Saarland University [Saarbrücken]
David J. Rapp: ETHOS - Ethique, Technologies, Humains, Organisations, Société - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], IMT-BS - DEFI - Département Droit, Économie et Finances - TEM - Télécom Ecole de Management - IMT - Institut Mines-Télécom [Paris] - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], LITEM - Laboratoire en Innovation, Technologies, Economie et Management (EA 7363) - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris]

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Abstract: In her paper "Corporate Risk Evaluation in the Context of Austrian Business Cycle Theory" recently published in this journal, Joanna Kruk aims to investigate how artificially low interest rates resulting from central bank intervention distort individual investment appraisals and ultimately result in both entrepreneurial misjudgment and resource-wasting malinvestment, fueling the business cycle. She identifies entrepreneurs' net present value calculations, supposedly unadjusted for risk, as a major issue and suggests adjusting those calculations for risk via both the duration method and the Capital Asset Pricing Model to mitigate the distorting effects. Her argumentation is, however, trapped in neoclassical reasoning and is adversely affected by several misconceptions of the net present value criterion. This comment seeks to reveal those fallacies and explain how to address uncertainty when using net present value calculations to make those calculations part of the solution rather than part of the problem of entrepreneurial misjudgment. The findings are derived from German investment theory rooted in the Austrian school of thought, meaning that they differ compared to those of neoclassical finance theory.

Date: 2021-07-29
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Published in Quarterly Journal of Austrian Economics, 2021, 24 (2), pp.348-359. ⟨10.35297/qjae.010097⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03318361

DOI: 10.35297/qjae.010097

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