Capital Budgeting and Investment Decision

The articles:

1. Capital Budgeting: NPV v. IRR Controversy
2. CAPM-based capital budgeting and nonadditivity

The reason:

To know the used of capital-budgeting decision-making for accept-reject situations.

Components of Comparison	Article from CRP	Article from Student
Title	Capital Budgeting: NPV v. IRR Controversy	CAPM-based capital budgeting and nonadditivity
Topic	Capital Budgeting and Investment Decisions	Capital Budgeting and Investment Decisions
Theory used by article	Capital budgeting decisions are among the most important choices made by managers; selection or rejection of investment proposals defines the firm’s profitability and, in the end, its survival.	Rubinstein (1973) The disequilibrium NPV upholding it not only for decision purposes but for valuation purposes as well and the (risk-adjusted) cost of capital is the “appropriate discount rate for the project”
Hypothesis of research	NPV and IRR method is plain mathematics and does not pretend to be ranking device	The disequilibrium NPV is logically deducted from the CAPM for decision-making purposes.
Variables used in research	Cash flow Discount rate	End-of-period cash flow of asset Expected end-of-period cash flow of asset Expected rate of return of asset Market rate of return. Variance of market rate of return Risk-free rate of return Cost of project NPV of asset
Method of analysis	NPV method IRR method	Disequilibrium NPV
Result of the analysis	NPV and IRR are not two measures of investment worth, they are just two sides of one and the same method. Both finding NPV and IRR follow from the very same mathematics.	The disequilibrium NPV is logically deducted from the CAPM for decision-making and NPV provides nonadditive values, which makes it inconsistent with the no-arbitrage principle.

CAPM-based capital budgeting and nonadditivity