Examining RADR as a Valuation Method in Capital Budgeting

Abstract

The risk adjusted discount rate (RADR) method is used as a valuation tool to assess projects that involve multi-period uncertain cash flows. Little research has been conducted to examine the validity of the RADR method. Extensive literature has been developed to assess the value of the multi-period project within the capital asset pricing model (CAPM) framework. Most were normative, so that their implementation was virtually impossible. In this paper the general valuation method, RADR, is examined to see if it is appropriate to discount a series of uncertain cash flows at the risk-adjusted discount rate.