Ambiguity of Application of CAPM in Project Valuation [Ambiguità Nell’Applicazione Del CAPM Per La Valutazione Degli Investimenti]
Analisi Finanziaria, Vol. 64, pp. 4-14, 2007
17 Pages Posted: 31 May 2009
Abstract
This work deals with the classical capital-budgeting criterion derived from the CAPM, according to which a project is profitable if and only if its expected return rate is greater than the cost of capital. This criterion, presented by several authors (e.g. Rubinstein, 1973) is regarded as theoretically impeccable. In fact, it brings about (seeming) theoretical ambiguities, because it induces the existence of four profitable indexes, two of which are nonadditive.The decision process is reshaped by replacing the “invest/no invest" dychotomy with the problem "invest in one of two alternative investments"(one of which is possibly represented by the null alternative). As a result, the two non additive indexes disappear, and the remaining ones are equivalent.
Note: Downloadable document is in Italian.
Keywords: net present value, CAPM, equilibrium, disequilibrium, ambiguities
JEL Classification: G11, G12, G31
Suggested Citation: Suggested Citation
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