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Decision-Making Allowing for Uncertainty of Future Investment Opportunities

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  • Seymour Kaplan

    (New York University)

  • Norman N. Barish

    (New York University)

Abstract

All capital investment decisions are made under varying degrees of risk and uncertainty. Evaluations of the desirability of capital investments require estimates of present conditions as well as forecasts of future events which involve these risks and uncertainties. Several recently developed models for capital investment decision-making have involved the random variable treatment of anticipated cash flows. When present worth calculations are made in these cases, a fixed interest rate is usually assumed. When internal rate of return calculations are made, the minimum acceptable rate of return is given a fixed value. This paper treats the minimum attractive rate of return (used with present worth calculations) and the minimum acceptable internal rate of return (used with internal rate of return calculations) as stochastic variables having subjective probability distributions. This procedure takes explicit account of the uncertainty of future investment opportunities. It is shown that, under certain circumstances, significant differences in the values of the mean and the variance of the criteria for making the investment decision are obtained when the results of this procedure are compared with results using the usual deterministic interest rate or minimum acceptable rate of return.

Suggested Citation

  • Seymour Kaplan & Norman N. Barish, 1967. "Decision-Making Allowing for Uncertainty of Future Investment Opportunities," Management Science, INFORMS, vol. 13(10), pages 569-577, June.
  • Handle: RePEc:inm:ormnsc:v:13:y:1967:i:10:p:b569-b577
    DOI: 10.1287/mnsc.13.10.B569
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    Cited by:

    1. Farrell, Niall, 2023. "Policy design for green hydrogen," Renewable and Sustainable Energy Reviews, Elsevier, vol. 178(C).
    2. Krzysztof Piasecki & Anna Łyczkowska-Hanćkowiak, 2019. "Representation of Japanese Candlesticks by Oriented Fuzzy Numbers," Econometrics, MDPI, vol. 8(1), pages 1-24, December.
    3. Helena Gaspars-Wieloch, 2017. "Newsvendor problem under complete uncertainty: a case of innovative products," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 25(3), pages 561-585, September.
    4. Lunnan, Randi & Meyer, Klaus & Mudambi, Ram & Yang, Qin, 2023. "The impact of knowledge and financial resource flows for MNE strategy: A typology of subsidiary roles," International Business Review, Elsevier, vol. 32(6).
    5. Patricia Born & Randy Dumm & Mark E. Johnson, 2023. "Epistemic uncertainty in catastrophe models—A base level examination," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 26(2), pages 247-269, July.
    6. Piasecki, Krzysztof, 2011. "Effectiveness of securities with fuzzy probabilistic return," MPRA Paper 46214, University Library of Munich, Germany.
    7. Helena Gaspars-Wieloch, 2019. "Project Net Present Value estimation under uncertainty," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 27(1), pages 179-197, March.
    8. Helena Gaspars-Wieloch, 2018. "The Impact of the Structure of the Payoff Matrix on the Final Decision made Under Uncertainty," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 35(01), pages 1-27, February.
    9. Anderson, J.R., 1989. "Forecasting, uncertainty, and public project appraisal," Policy Research Working Paper Series 154, The World Bank.
    10. Anna Łyczkowska-Hanćkowiak, 2019. "Sharpe’s Ratio for Oriented Fuzzy Discount Factor," Mathematics, MDPI, vol. 7(3), pages 1-16, March.
    11. Krzysztof M. Piasecki, 2011. "Effectiveness of securities with fuzzy probabilistic return," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 21(2), pages 65-78.
    12. Krzysztof Piasecki & Joanna Siwek, 2018. "The portfolio problem with present value modelled by a discrete trapezoidal fuzzy number," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 28(1), pages 57-74.

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