Resumen
AbstractThe purpose of this technical note is to draw attention to the problems which are inherent in the use of certainty equivalent coefficients as an approach to incorporating risk into capital budgeting. More specifically, the certainty equivalent coefficient net present value criterion violates an important principle of cash flow determination for discounted cash flow analysis. Further, this approach precludes the use of net present value profiles which are pivotal when evaluating conflicts among mutually exclusive projects. In addition, use of certainty coefficient equivalents amounts to an acknowledgement that the concept, function and use of the cost of capital is improperly understood.