UPDATING UNDER RISK CONDITION

Vaduva Cecilia Elena and Vaduva Maria
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Vaduva Cecilia Elena: CONSTANTIN BRANCUSI UNIVERSITY OF TG-JIU, FACULTY OF ECONOMIC SCIENCE
Vaduva Maria: CONSTANTIN BRANCUSI UNIVERSITY OF TG-JIU, FACULTY OF ECONOMIC SCIENCE

Annals - Economy Series, 2018, vol. 1, 73-80

Abstract: The foundation for future firm development is investment. Agents have a risk aversion requiring higher returns as the risks associated with the project will be greater. The investment decision determines the market firm's affirmation, increasing the market share, dominating the market. Making an investment at a certain point will determine certain cash flows throughout the life of the project, and a residual value can be obtained when it is taken out of service. The flows and payments for the investment project can be more easily tracked if we are proposing a constant update rate. We will be able to analyze, based on various factors, three techniques for determining the discount rate for investment projects: the opportunity cost, the risk-free rate, and a series of risk premiums, the weighted average cost of capital. People without financial training make value judgments for investment projects based on other market opportunities, comparing the returns that any investment offers to other pay options. An investor has a sum of money he wants to make - if he does not invest in a project, he will invest in another, that will bring him a certain amount of money, choosing the most advantageous project by comparison. All projects are characterized by identical risks, and the agents are considered indifferent to the risks. The answer given by financial theory and practice to the disadvantage of rates in the opportunity cost category is the discount rate calculated as a sum of the risk-free rate and a risk premium, defining the risk as a factor whose action may cause a possible decrease in cash of the available flows. Higher objectivity is presented by the opportunity cost update rates of update because it refers to known variables but cannot be perfectly matched to the performance of the investment process.

Keywords: risk; discount rate; weighted average cost of capital; investments; profitability; market; opportunity cost (search for similar items in EconPapers)
Date: 2018
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