Capital investment appraisal: a new risk premium model
Fox, RP and Baker, RD 2003, 'Capital investment appraisal: a new risk premium model' , International Transactions In Operational Research, 10 (2) , pp. 115-126.
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Net Present Value (NPV) is the principal valuation model of the financial literature. Firms are accordingly directed, as a matter of good practice, to adopt the model for selecting investment projects, yet questionnaire surveys show that the adoption rate has been very slow and the quality of usage questionable. In particular, alternative risk measures are popular amongst practitioners. In this paper we remodel the treatment of risk in the NPV model based on assumptions that seem realistic in an organizational or operational, as opposed to a personal, investment context. We derive formulas for calculating: the appropriate discount rate, a 'risk horizon' (where the risk premium exceeds the expected value), and a maximum default hazard point for projects. These measures provide a rationale for non-NPV approaches to risk measurement in questionnaire responses and offer a practical benefit to investors.
|Uncontrolled Keywords:||decision • applications • forecasting • applications • financial • investment • planning • risk|
|Themes:||Subjects / Themes > H Social Sciences > HG Finance|
Subjects outside of the University Themes
|Schools:||Colleges and Schools > College of Business & Law > Salford Business School > Finance, Accounting and Economics|
|Journal or Publication Title:||International Transactions In Operational Research|
|Depositing User:||RP Fox|
|Date Deposited:||17 May 2010 09:26|
|Last Modified:||17 Apr 2013 13:26|
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