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The Evaluation of Risky Investments with Random Timing of Cash Returns

Author

Listed:
  • Stylianos Perrakis

    (University of Ottawa)

  • Claude Henin

    (University of Ottawa)

Abstract

This paper provides a computational technique for the evaluation of the distribution of the net present value (NPV) of an investment, in which the cash inflows occur at random time points, as in the case of venture capital. The initial cash outlay is deterministic and the magnitudes of the cash inflows are nonnegative, random variables with known distributions. The lengths of the intervals between successive cash inflows are independently distributed and independent of the magnitude of the inflows. The Laplace transforms and the first two moments of the distribution are computed for both independent and perfectly correlated inflows. It is shown that the use of constant time intervals when the timing of the inflows is random underestimates the variance of the distribution of the NPV.

Suggested Citation

  • Stylianos Perrakis & Claude Henin, 1974. "The Evaluation of Risky Investments with Random Timing of Cash Returns," Management Science, INFORMS, vol. 21(1), pages 79-86, September.
  • Handle: RePEc:inm:ormnsc:v:21:y:1974:i:1:p:79-86
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    File URL: http://dx.doi.org/10.1287/mnsc.21.1.79
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    Cited by:

    1. Hay, Diana & Rastegar, Reza & Roitershtein, Alexander, 2011. "Multivariate linear recursions with Markov-dependent coefficients," Journal of Multivariate Analysis, Elsevier, vol. 102(3), pages 521-527, March.
    2. Ghosh, Arka P. & Hay, Diana & Hirpara, Vivek & Rastegar, Reza & Roitershtein, Alexander & Schulteis, Ashley & Suh, Jiyeon, 2010. "Random linear recursions with dependent coefficients," Statistics & Probability Letters, Elsevier, vol. 80(21-22), pages 1597-1605, November.
    3. Selçuk Onay & Ayse Öncüler, 2007. "Intertemporal choice under timing risk: An experimental approach," Journal of Risk and Uncertainty, Springer, vol. 34(2), pages 99-121, April.

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