Inconsistencies In Textbook Presentation Of Capital Budgeting Criteria

Abstract

Corporate finance textbooks state conflicting criteria for capital budgeting projects.  There are three main versions of the criteria, which contradict one another.  Some texts advocate accepting all projects with a positive or zero net present value (equivalently, all projects with internal rate of return exceeding or equaling the required rate of return).  Other texts call for accepting only positive NPV projects and rejecting those with zero NPVs.  Still other texts advocate indifference when NPV is zero.  The texts then are inconsistent with one another in a matter of straightforward theory.  Moreover, a number of textbooks are internally inconsistent, stating rules for the case of NPV equals zero that are at odds with their stated rule for the IRR criterion.  In practical finance, the implications of this theoretical difference will be very limited.  For pedagogy, however, the failure to state theory correctly and clearly can have a greater impact upon learning.