Evaluating Income Streams: A Decision Analysis Approach

James E. Smith
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James E. Smith: Fuqua School of Business, Duke University, Durham, North Carolina 27708-0120

Management Science, 1998, vol. 44, issue 12-Part-1, 1690-1708

Abstract: Most important decision problems---virtually all capital investments and planning situations---involve risky cash flows with uncertainties that are resolved over time. In most of these problems, the decision-maker has access to financial markets and may borrow and lend to smooth consumption over time. Yet, because of the difficulty of incorporating these borrowing and lending decisions into the evaluation models, these opportunities are rarely explicitly modeled in decision and risk analyses of these investments. In this paper, we study the errors induced by failing to account for these borrowing and lending decisions, and we develop extensions to the standard decision and risk analysis procedures that, given certain market and preference assumptions, take these borrowing and lending opportunities into account without overburdening the evaluation models.

Keywords: Decision Analysis; Temporal Resolution of Uncertainty; Risk Profiles (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:44:y:1998:i:12-part-1:p:1690-1708

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