Capital Budgeting in the Presence of Autocorrelated Returns

9 Pages Posted: 28 Jan 2004

See all articles by Jörg Laitenberger

Jörg Laitenberger

University of Hannover - Economics and Business Administration Area

Date Written: January 15, 2004

Abstract

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

Suggested Citation

Laitenberger, Jörg, Capital Budgeting in the Presence of Autocorrelated Returns (January 15, 2004). Available at SSRN: https://ssrn.com/abstract=494662 or http://dx.doi.org/10.2139/ssrn.494662

Jörg Laitenberger (Contact Author)

University of Hannover - Economics and Business Administration Area ( email )

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