Capital Budgeting in the Presence of Autocorrelated Returns
9 Pages Posted: 28 Jan 2004
Date Written: January 15, 2004
In this paper, it is argued that the discount rates used for the omputation of the present values of an investment project with cash-flows to be realized over several years have to be adjusted when the one-period returns of the investment project are autocorrelated. The formula of the correct discount rate is deduced. For the case of a simple return process with a mean reverting component, the adjustment is significant only for early periods and has alternating signs.
Keywords: Cost of capital, capital budgeting
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