Computing present values: Capital budgeting done correctly

This paper shows that the standard textbook formula for computing the present value of a future random cash flow – the discounted expected value – is formally incorrect and can generate significant errors when used to compute present values. The correct present value method is provided as well as a simple adjustment to the textbook formula which can be used to obtain an approximation to the correct value.

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Year of publication:	2014
Authors:	Jarrow, Robert
Published in:	Finance Research Letters. - Elsevier, ISSN 1544-6123. - Vol. 11.2014, 3, p. 183-193
Publisher:	Elsevier
Subject:	Present value \| No arbitrage \| Capital budgeting

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Type of publication:	Article
Classification:	G31 - Capital Budgeting; Investment Policy ; G12 - Asset Pricing ; G10 - General Financial Markets. General ; G13 - Contingent Pricing; Futures Pricing
Source:	RePEc - Research Papers in Economics

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