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Risk evaluation of investment projects

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  • Bonini, Charles P

Abstract

A survey is given of techniques for evaluation of risk in individual capital investment projects. The paper identifies the four types of relationships affecting project uncertainty: (1) Accounting-type relationships defining cash flow; (2) Statistical relationships among variables in a given time period; (3) Autocorrelation relationships among cash flows over time; and (4) Uncertainty about project life. Two types of decisions also can affect project profitability and uncertainty: (1) Strategy decisions; and (2) Abandonment decisions. Four types of models for risk evaluation are identified: (1) Certainty model; (2) Hillier model; (3) Monte Carlo model; and (4) Decision Tree model. These four types of models are compared and evaluated in terms of how easily they can incorporate the relationships and decisions mentioned above. Computational issues are also discussed. Suggestions are made for further research.

Suggested Citation

  • Bonini, Charles P, 1975. "Risk evaluation of investment projects," Omega, Elsevier, vol. 3(6), pages 735-750, December.
    • Handle: RePEc:eee:jomega:v:3:y:1975:i:6:p:735-750
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    Cited by:

    1. Hsin-Ting SU & Yeou-Koung Tung, 2014. "Comparisons of Risk-based Decision Rules for the Application of Water Resources Planning and Management," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(12), pages 3921-3935, September.
    2. Di Lorenzo, Giuseppina & Pilidis, Pericles & Witton, John & Probert, Douglas, 2012. "Monte-Carlo simulation of investment integrity and value for power-plants with carbon-capture," Applied Energy, Elsevier, vol. 98(C), pages 467-478.
    3. Anderson, J.R., 1989. "Forecasting, uncertainty, and public project appraisal," Policy Research Working Paper Series 154, The World Bank.

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