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The Incorporation of Uncertainty Into Investment Evaluations

In: Cost Analysis and Estimating

Author

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  • William Resnick

    (Israel Institute of Technology, Department of Chemical Engineering)

Abstract

Evaluations of investment proposals based on forecast cash flows are subject to uncertainties and the more remote in time a cash flow is expected to occur the greater the degree of uncertainty. A simple technique is proposed here which manipulates the discounting procedures so that late-occurring cash flows are penalized more severely in present value terms than they would be by customary discounting. The technique proposed transforms calendar time to risk-time by means of a risk-exponent but otherwise uses conventional profitability measures. Guidance in the choice of the appropriate values for the risk-exponent is given.

Suggested Citation

  • William Resnick, 1990. "The Incorporation of Uncertainty Into Investment Evaluations," Springer Books, in: Willis R. Greer Jr. & Daniel A. Nussbaum (ed.), Cost Analysis and Estimating, pages 182-200, Springer.
    • Handle: RePEc:spr:sprchp:978-1-4612-0995-9_8
    DOI: 10.1007/978-1-4612-0995-9_8
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