CH - 12 - Risk Analysis in Capital Budgeting
CH - 12 - Risk Analysis in Capital Budgeting
CH - 12 - Risk Analysis in Capital Budgeting
LEARNING OBJECTIVES
2
For these reasons, a forecaster should not give just one estimate,
but a range of associated probability–a probability distribution.
Payback
Risk-adjusted discount rate
Certainty equivalent
Risk Analysis in Practice
15
k = kf + kr
Risk-adjusted Discount Rate: Merits
20
It does not make any risk adjustment in the numerator for the
cash flows that are forecast over the future years.
First,
the forecaster, expecting the reduction that will be
made in his forecasts, may inflate them in anticipation.
Define investment
Identify decision alternatives
Draw a decision tree
decision points
chance events
Analyse data
Usefulness of Decision Tree Approach
38