Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?

Carlo Alberto Magni

MPRA Paper from University Library of Munich, Germany

Abstract: This paper focuses on inconsistencies arising from the use of NPV and CAPM for capital budgeting. It shows that (i) CAPM capital budgeting decision-making based on disequilibrium NPV is deductively inferred by the Capital Asset Pricing Model, (ii) the use of the disequilibrium NPV is widespread in finance both as a decision rule and as a valuation tool, (iii) the disequilibrium NPV does not guarantee additivity nor consistency with arbitrage pricing, so that it is unreliable for valuation, (iv) Magni’s (2002, 2007a, forthcoming) criticism of the NPV criterion refers to the disequilibrium NPV, and De Reyck’s (2005) project valuation method, on the basis of which Magni’s criticism to NPV is objected, leaves decision makers open to arbitrage losses and incorrect decisions.

Keywords: Corporate finance; investment analysis; Net Present Value; Capital Asset Pricing Model; disequilibrium; decision; valuation; nonadditivity; arbitrage (search for similar items in EconPapers)
JEL-codes: G11 G12 G31 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:5471

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