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Net Present Value With Uncertainty
Company: Norwegian Computing Center
Year Of Publication: 2006
Month Of Publication: February
Pages: 13
Download Count: 442
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 2-11-2007
Publisher: Administrator
Summary
Projects may be evaluated and compared according to the Net Present Value(NPV) of their cash flow. The NPV is the discounted expected revenues minusthe costs over the lifetime of the project. Traditional NPV calculations do not takeinto account the uncertainty in the variables that influence the revenues and costs.We present a simulation approach to incorporate uncertainty in the NPV calculations.We build a joint stochastic model for the most influential input variablesof the NPV calculation. From this model we simulate correlated scenariosof these variables and calculate the NPV. This way, the uncertainty in the inputvariables are transferred to the NPV calculations. The resulting probability distributionof the NPV takes into account worst-case scenarios that arise when severalfactors evolve in undesired directions at the same time. This allows us to measurethe uncertainty associated with the NPV using confidence intervals or the Valueat-Risk (VaR).
Author(s)
Dimakos, Xeni Kristine Sign in to follow this author
Aas, Kjersti Sign in to follow this author
Neef, Linda R. Sign in to follow this author
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