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Use of Probabilistic Cash Flows in Analyzing Investments Under Conditions of Risk and Uncertainty*

Published online by Cambridge University Press:  28 April 2015

James W. Richardson  and
Harry P. Mapp Jr.
James W. Richardson
Affiliation:
Department of Agricultural Economics, Oklahoma State University
Harry P. Mapp Jr.
Affiliation:
Department of Agricultural Economics, Oklahoma State University
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Extract

Managers of business firms, large or small, farm or nonfarm, must make investment decisions under conditions of risk and uncertainty. However, in evaluating investments, the assumption of perfect knowledge has often been used to simplify the analysis. For example, an estimate of average annual net returns is frequently discounted into perpetuity to evaluate a real estate investment alternative. Capital budgeting literature suggests a number of approaches to evaluating alternative investments. However, use of concepts such as the payback period, average rate of return, internal rate of return and net present value embodies the assumption of perfect knowledge.

Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 8 , Issue 2 , December 1976 , pp. 19 - 24
Copyright
Copyright © Southern Agricultural Economics Association 1976

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Footnotes

*

Journal Article J-3175 of the Oklahoma Agricultural Experiment Station. The authors benefited from suggestions made by Odell Walker, Clint Roush and the reviewers for this Journal.

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