Duration Measures for Corporate Project Valuation (original) (raw)
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In this research, the concept of Duration with a new application in project management has been defined. The Duration of each project provides the project manager with a combined measure containing concepts of return, cost and time of the project. Further in this article, the changes in project return, based on different assumptions such as discount rate, have been examined. To examine the effect of the changes in these factors, the Monte Carlo simulation has been used. The relationship between these factors is nonlinear which reflects the great importance of investment on appropriate risk management systems. The data from a set of construction projects have been used in order to verify the results of this study. Similar relationships can be expected to exist in other industries as well.
Sensitivity analysis in investment project evaluation
International Journal of Production Economics, 2004
This paper discusses the sensitivity analysis of valuation equations used in investment decisions. Since financial decision are commonly supported via a point value of some criterion of economic relevance (net present value, economic value added, internal rate of return, etc.), we focus on local sensitivity analysis. In particular, we present the differential importance measure (DIM) and discuss its relation to elasticity and other local sensitivity analysis techniques in the context of discounted cash flow valuation models. We present general results of the net present value and internal rate of return sensitivity on changes in the cash flows. Specific results are obtained for a valuation model of projects under severe survival risk used in the industry sector of power generation.
European Journal of Operational Research, 2010
Evaluating the economic attractiveness of large projects often requires the development of large and complex financial models. Model complexity can prevent management from obtaining crucial information, with the risk of a suboptimal exploitation of the modelling efforts. We propose a methodology based on the so-called ''differential importance measure ðDÞ" to enhance the managerial insights obtained from financial models. We illustrate our methodology by applying it to a project finance case study. We show that the additivity property of D grants analysts and managers full flexibility in combining parameters into any group and at the desired aggregation level. We analyze investment criteria related to both the investors's and lenders' perspectives. Results indicate that exogenous factors affect investors (sponsors and lenders) in different ways, whether exogenous variables are considered individually or by groups.
Ratings of The Investment Projects of Arbitrary Durations: New Methodology
Journal of Reviews on Global Economics, 2019
In this paper we develop for the first time a new approach to ratings of the investment projects of arbitrary durations, which could be applied to investments of any area of economy and in particular to energy projects.The ratings of such energy projects, as "Turkish stream", "Nord stream-2", energy projects relating to clean, renewable and sustainable energy, as well as relating to pricing carbon emissions (McAleer et al., 2018a,b,c; 2019) could be done using developed here new rating methodologies. In our previous papers the new approach to the ratings of the long–term investment projects has been developed (Filatova et al., 2018). The important features of that consideration are as following: 1) The incorporation of rating parameters (financial "ratios"), used in project rating and playing a major role in it, into modern long–term investment models, 2) The adequate use of discounting of financial flows virtually not used in existing project rating methodologies. Here, for the first time, we incorporate the rating parameters (financial "ratios"), used in project rating, into modern investment models, describing the investment projects of arbitrary durations. This was much more difficult task then in case of the long–term investment projects, considered by us in previous papers. We work within investment models, created by authors. One of them describes the effectiveness of investment project from perspective of equity capital owners, while other model describes the effectiveness of investment project from perspective of equity capital and debt capital owners. New approach allows use the powerful instruments of modern theory of capital cost and capital structure (BFO theory) (Brusov et al., 2015, 2018) and modern investment models, created by the authors and well tested in the real economy to evaluate investment project performance, including energy projects. In our calculations we use Excel technique in two aspects: 1) we calculate WACC at different values of equity costs k0, different values of debt costs kd and different values of leverage level L=D/S, using the famous BFO formula; 2) we calculate the dependences of NPV on coverage ratios as well as leverage ratios at different values of equity costs k0, different values of debt costs kd and different values of leverage level L.
Multicriteria cash-flow modeling and project value-multiples for two-stage project valuation
International Journal of Project Management, 2008
The analysis of project risk, return and value (PRRV) using the NPV model is essential for capital budgeting decision support. The major difficulty arises from the need to model the expected cash-flow stream. On the grounds that different cash-flow components (CFC) may ask for different projection criteria, this paper formulates a general (i.e., free of built-in assumptions) PRRV analysis method that allows to incorporate preferences and expectations in the form of specific projection criteria-formulated in terms of ratios and rates of change-for each CFC. Value-multiples, widely used in the field of firm-valuation, may be easily adapted to project appraisal, thus providing alternative indicators for project ranking and selection. This possibility, together with a two-stage approach-first ignoring and then considering the project specific financial structure-and sensitivity analysis using scenario simulation are also discussed.
Adjusting Time for Uncertain Project Assessment
International Journal of Economics and Finance, 2016
This paper presents a novel methodology to include the risk when determining the net present value of an investment. More specifically, the risk of cash flows is priced by the delay in the payment of debts not at the initially agreed maturities, but at later dates. To do this, first we recall the classical methods which introduce a certain risk correcting parameter before determining the net present value of the project. The key idea of this new model is to transfer the risk to the time embedded in the expression of the discount function by using a suitable deformation of this parameter. In this way, the risk is measured by the delay in the initially agreed maturity when obtaining the corresponding cash flow. On the other hand, the way to include the risk in a project is based on an adaptation of the Krugman"s curve which describes the relationship between debt maturities and their respective expectations of being obtained. The empirical contribution is based on the use of real data of payment delays corresponding to Spanish companies in 2015. This procedure allows to fit the risk of an investment project from a more realistic perspective and so to determine more accurately its net present value. Keywords: investment project, risk, net present value, deformation of time multiplied by an adjusting factor based on the standard deviation of each random variable (see Section 2). 2) If the cash flows are not random variables, we can modify the interest rate and the time parameter. Inside this second alternative, there are several possibilities:
Uncertainty and global sensitivity analysis in the evaluation of investment projects
International Journal of Production Economics, 2006
This paper discusses the use of global sensitivity analysis (SA) techniques in investment decisions. Global SA complements and improves uncertainty analysis (UA) providing the analyst/decision-maker with information on how uncertainty is apportioned by the uncertain factors. In this work, we introduce global SA in the investment project evaluation realm. We then need to deal with two aspects: (1) the identification of the appropriate global SA method to be used and (2) the interpretation of the results from the decision maker point of view. For task 1, we compare the performance of two family of techniques: non-parametric and variance decomposition based. For task 2, we explore the determination of the cash flow global importance (GI) for valuation criteria utilized in investment project evaluation. For the net present value (NPV), we show that it is possible to derive an analytical expression of the cash flow GI, which is the same for all the techniques. This knowledge enables us to: (1) offer a direct way to compute cash flow GI; (2) illustrate the practical impact of global SA on the information collection process. For the internal rate of return (IRR), we show that the same conclusions cannot be driven. In particular, (a) one has to utilize a numerical approach for the computation of the cash flow influence, since an analytical expression cannot be found and (b) different techniques can produce different ranking. These observations are illustrated by means of the application to a model utilized in the energy sector for the evaluation of projects under survival risk. The quantitative comparison of cash flow ranking with respect to the NPV and IRR concludes the paper, illustrating that information obtained from the SA of the NPV cannot be transferred to the IRR.
Risk-Sensitive Value Measure Method for Projects Evaluation
Journal of Real Options and Strategy, 2010
In this paper we study the evaluation problems for random cash flows. We first consider the evaluation of random variables, which are supposed to present the random present values (RPV) of cash flows, and investigate what the suitable evaluation functional of RPV is. We see that the concave monetary value measure (or concave monetary utility function) is the most suitable candidate for this end. Next we extend the value measure to a dynamic value measure. Then we see that the idea of time-consistency is very important, and that the dynamic entropic value measure is the best one. We can see that this dynamic value measure is related to the risk sensitive control. And finally we conclude that the risk sensitive value measure method, which is a combination of the ideas such that monetary utility function, indifference price, real option approach, time-consistency and risk sensitive control, should be the most powerful method for the project evaluation. We also explain how to apply our results to practical problems.
Forecasting project duration using risk-based earned duration management
The international journal of construction management, 2020
Earned duration management (EDM) is an extension of earned value management (EVM) in which the schedule performance of the project is evaluated using time-based data with no dependency on project cost data. While the use of EDM leads to a more accurate and realistic performance evaluation of the project schedule, it, however, does not differentiate between critical and non-critical activities and their related risk factors. This can lead to misleading information in cases where critical activities are behind schedule. Accordingly, this paper presents a new risk-based earned duration management model (RBEDM) for monitoring and estimating schedule performance of projects considering critical activities only and their associated risk factors. The contribution of this research to the body of knowledge lies in its newly introduced risk adjustment factor (RAF cr) which quantifies the impact of future uncertainties associated with critical activities in estimating project duration at completion. The introduced risk adjustment factor addresses the main drawback of EDM for its reliance only in past performance data. A numerical example from the literature is utilized to highlight the limitations of the existing models and demonstrate the capability of the developed model in monitoring and estimating a more accurate and realistic schedule performance.
World Journal of Advanced Engineering Technology and Sciences, 2021
Over the years, Life Cycle Costing (LCC) has been recognized and used as an important technique for evaluating, forecasting and discounting the future costs of building to the present day value, from conception, design to completion, operation, maintenance, down to decommissioning. This work presents a study of Analysis on different discount rate of the forecasts cost of building project using sensitivity analysis techniques, the case study being Calabar International Conference Center (CICC) building project. Life cycle cost analysis was conducted and forecast for 51 years using Net present value (NPV) with the following discount rates 4%, 5%, 6%, 8%, 10%, 12% and 13% respectively. Results showed that the lower the discount rates, the higher the cost value and via vasa. The building had a positive value >0 indicating a significant benefit at the end of the study period. The percentage contribution of the discount rate on the initial cost, salvage value and the life cycle cost in...