A Probabilistic Alternative Approach to Optimal Project Profitability Based on the Value-at-Risk

Yonggu Kim and Eul-Bum Lee
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Yonggu Kim: Graduate Institute of Ferrous Technology & Graduate School of Engineering Mastership, Pohang University of Science and Technology, 77, Cheongam-ro, Nam-gu, Pohang-si, Gyeongsangbuk-do 37673, Korea
Eul-Bum Lee: Graduate Institute of Ferrous Technology & Graduate School of Engineering Mastership, Pohang University of Science and Technology, 77, Cheongam-ro, Nam-gu, Pohang-si, Gyeongsangbuk-do 37673, Korea

Sustainability, 2018, vol. 10, issue 3, 1-24

Abstract: This paper focuses on an investment decision-making process for sustainable development based on the profitability impact factors for overseas projects. Investors prefer to use the discounted cash-flow method. Although this method is simple and straightforward, its critical weakness is its inability to reflect the factor volatility associated with the project evaluation. To overcome this weakness, the Value-at-Risk method is used to apply the volatility of the profitability impact factors, thereby reflecting the risks and establishing decision-making criteria for risk-averse investors. Risk-averse investors can lose relatively acceptable investment opportunities to risk-neutral or risk-amenable investors due to strict investment decision-making criteria. To overcome this problem, critical factors are selected through a Monte Carlo simulation and a sensitivity analysis, and solutions to the critical-factor problems are then found by using the Theory of Inventive Problem Solving and a business version of the Project Definition Rating Index. This study examines the process of recovering investment opportunities with projects that are investment feasible and that have been rejected when applying the criterion of the Value-at-Risk method. To do this, a probabilistic alternative approach is taken. To validate this methodology, the proposed framework for an improved decision-making process is demonstrated using two actual overseas projects of a Korean steel-making company.

Keywords: Value-at-Risk; probabilistic alternative approach; Theory of Inventive Problem Solving; Project Definition Rating Index; optimal project profitability (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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