Capital Budgeting and the Stochastic Cost of Capital

Abstract

Despite its shortcomings, the IRR method continues to be a widely employed evaluation technique in capital budgeting. This paper demonstrates the reasons for its continued popularity. Specifically, the non‐requirement of a discount rate is suggested to be an important factor in the choice of IRR over the NPV criterion. A major implication is that managers face a very elusive, or stochastic, discount rate for NPV analysis. Thus, the aversion to NPV may go beyond simple aesthetics.

Citation

Chatrath, A. and Seiler, M.J. (1997), "Capital Budgeting and the Stochastic Cost of Capital", Managerial Finance, Vol. 23 No. 9, pp. 16-23. https://doi.org/10.1108/eb018644