IDEAS home Printed from https://ideas.repec.org/a/bla/jacrfn/v34y2022i3p110-115.html
   My bibliography  Save this article

Uncertainty in Capital Budgeting: Five Particular Safety‐(or Danger‐) Margins from the NPV Formula

Author

Listed:
  • Richard A. Miller

Abstract

The primary approaches for evaluating prospective capital projects, which are investments (outlays) with future financial benefits, are net present value (NPV) and the internal rate of return (IRR), both based on the discounted expected positive and negative cash flows. The NPV formula can be used to provide three additional insights into the evaluation of prospective investment opportunities: normal profit, economic (discounted) payback (or breakeven) period, and maximum investment cost. A review of over two centuries of discussion of capital budgeting techniques reveals no discussion of two alternative approaches and little discussion of a third. This note explores the evolution of capital budgeting techniques, and explains with examples these variations of the NPV formula as additional approaches to evaluating inherently uncertain investment decisions. The formula can be used to calculate “safety‐margins” (also “danger‐margins”) in evaluating potential investments.

Suggested Citation

  • Richard A. Miller, 2022. "Uncertainty in Capital Budgeting: Five Particular Safety‐(or Danger‐) Margins from the NPV Formula," Journal of Applied Corporate Finance, Morgan Stanley, vol. 34(3), pages 110-115, September.
    • Handle: RePEc:bla:jacrfn:v:34:y:2022:i:3:p:110-115
    DOI: 10.1111/jacf.12522
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jacf.12522
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jacf.12522?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jacrfn:v:34:y:2022:i:3:p:110-115. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1078-1196 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.