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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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Abstract

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.

Item Type: Article
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
Publisher: Blackwell Publishing
Refereed: Yes
ISSN: 0969-6016
Depositing User: RP Fox
Date Deposited: 17 May 2010 08:26
Last Modified: 16 Oct 2014 19:36
URI: http://usir.salford.ac.uk/id/eprint/9299

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