An Alternative Approach to Capital Investment Appraisal

David Carmichael

The Engineering Economist, 2011, vol. 56, issue 2, 123-139

Abstract: The article presents an alternative and original method for establishing the present worth and feasibility of a capital investment where the underlying parameters of interest/discount rate, cash flows. and investment lifespan are uncertain. The method, based on Markov chains, complements existing and useful practices such as sensitivity analysis, Monte Carlo simulation, Hillier-style probabilistic analysis, and fuzzy sets. For the same underlying assumptions, the results of this alternative approach are the same as for these existing approaches, but the approach provides additional insight into discounted cash flow (DCF) analysis under uncertainty. The method will be found useful to persons doing investment analysis and looking at the risks associated with investment.

Date: 2011
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DOI: 10.1080/0013791X.2011.573616

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