Corporate Risk Evaluation in the Context of Austrian Business Cycle Theory

Abstract

This paper expands Fuller’s (2013) analysis of the net present value and interest rate changes in the context of the Austrian Business Cycle Theory. During the boom phase of the business cycle, the economy shifts to a more risky position as the result of entrepreneurs’ profit targeting. To quantify this risk the duration, defined as the number of periods that elapse before the average present value dollar is received from a stream of cash flows, can be used. The new risk-adjusted net present value is created after applying the duration to capital asset pricing model determining the discount rate that should be used to calculate the present value of the project.