Revisiting the Project Evaluation Techniques and Decision Making
Gaurav S. Chauhan and Pradip Banerjee
Indian Institute of Management Indore, India
Volume 10: 2015, pp. 291-320; ABSTRACT
A commonly addressed topic in Corporate Finance textbooks is capital budgeting, which evaluates the acceptance or rejection of different projects based on certain standard project evaluation criteria. However, finance texts do not fully incorporate the fact that a project is sensitive towards the magnitude, timing and riskiness of individual cash flows. We argue that the established practice of using a single discount rate as the cost of capital to evaluate the present worth of these cash flows could be misleading. We also argue for the irrelevance of reinvestment decisions of intermediate cash flows in project evaluation. Such reinvestment decisions, often independent concerns on the part of investors, may unduly contaminate project evaluation. Finally, we demonstrate that the Net Present Value (NPV) reflects the true worth of a project and is fundamentally the most precise way of evaluating projects.
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