On “investment decisions in the theory of finance: Some antinomies and inconsistencies”

In the paper “Investment Decisions in the Theory of Finance: Some antinomies and inconsistencies”, Magni [Eur. J. Operat. Res. 137 (2002) 206] shows that using the net present value rule for making investment decisions can lead to inconsistencies and antinomies. The author claims that the so-called...

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Bibliographic Details
Published in:European journal of operational research 2005-03, Vol.161 (2), p.499-504
Main Author: De Reyck, Bert
Format: Article
Language:English
Subjects:
Applied sciences
Equivalent risk
Exact sciences and technology
Finance
Investment policy
Net present value
Operational research and scientific management
Operational research. Management science
Portfolio theory
Real options
Real options analysis
Risk
Studies
Valuation
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Summary:In the paper “Investment Decisions in the Theory of Finance: Some antinomies and inconsistencies”, Magni [Eur. J. Operat. Res. 137 (2002) 206] shows that using the net present value rule for making investment decisions can lead to inconsistencies and antinomies. The author claims that the so-called equivalent-risk tenet of finance, whereby an investor needs to compare an investment opportunity with an asset of equivalent risk, is impossible to implement. In this paper, we show that the main thesis of this paper is incorrect, and that finance theory, when applied correctly, can be used to value investment projects by comparing assets of equivalent risk. We point out the fallacies in the author's reasoning and provide an alternative, and correct, methodology for valuing the projects described in the paper.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2003.09.006