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Capital-Budgeting Decisions Involving Combinations of Risky Investments

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  • James Van Horne

    (Graduate School of Business, Stanford University)

Abstract

In this paper, a method is proposed for evaluating combinations of investments when the cash flows are not known with certainty. Various probability concepts are employed; and combinations are evaluated according to their incremental contribution of expected net-present value and variance to the firm as a whole. It is shown that existing investment projects must be considered if the total risk of a particular combination of investment proposals is to be evaluated realistically. Through diversification of investments, a firm is able to obtain the most desirable combination of expected net-present value and risk.

Suggested Citation

  • James Van Horne, 1966. "Capital-Budgeting Decisions Involving Combinations of Risky Investments," Management Science, INFORMS, vol. 13(2), pages 84-92, October.
    • Handle: RePEc:inm:ormnsc:v:13:y:1966:i:2:p:b84-b92
    DOI: 10.1287/mnsc.13.2.B84
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    Cited by:

    1. Peter Brusov & Tatiana Filatova & Natali Orekhova, 2023. "Capital Structure Theory: Past, Present, Future," Springer Books, in: The Brusov–Filatova–Orekhova Theory of Capital Structure, chapter 0, pages 9-50, Springer.
    2. Creemers, Stefan, 2018. "Moments and distribution of the net present value of a serial project," European Journal of Operational Research, Elsevier, vol. 267(3), pages 835-848.
    3. Borgonovo, Emanuele & Gatti, Stefano, 2013. "Risk analysis with contractual default. Does covenant breach matter?," European Journal of Operational Research, Elsevier, vol. 230(2), pages 431-443.
    4. Marcin Dec, 2021. "From point through density valuation to individual risk assessment in the discounted cash flows method," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5621-5635, October.
    5. Lefley, Frank, 1997. "Approaches to risk and uncertainty in the appraisal of new technology capital projects," International Journal of Production Economics, Elsevier, vol. 53(1), pages 21-33, November.
    6. Marcin Dec, 2019. "From point through density valuation to individual risk assessment in the discounted cash flows method," GRAPE Working Papers 35, GRAPE Group for Research in Applied Economics.

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