What‘s Wrong with Modern Capital Budgeting?

I argue that the mainstream approach to capital budgeting focuses excessively on the special case where diversifiable risks do not affect the contribution of the project to the value of the firm. This approach ignores the impact of a new project on a firm‘s total risk and therefore often leads to an inappropriate assessment of the value of the project. I present arguments for why total risk is often costly and discuss how taking total risk into account in capital budgeting is necessary to make capital budgeting and capital structure decisions consistent.