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Cost Benefit Analysis with Uncertain Cash Flow and Project Life
Author(s) -
Quah Euston,
Tan Khye Chong
Publication year - 1999
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/1097-3923.00018
Subject(s) - cash flow , net present value , economics , cost–benefit analysis , certainty , present value , actuarial science , discounted cash flow , cash , risk analysis (engineering) , computer science , microeconomics , business , finance , mathematics , production (economics) , ecology , geometry , biology
When future cash flows and the lives of capital projects are known, the optimal solution is usually one of choosing the project that maximizes net present value of future returns on the project. In many situations, however, the information needed for cost‐benefit analysis is not known with certainty. Recent cost‐benefit models have tried to introduce some realism by assuming future cash flows are unknown but are subject to known probability laws. However, not much has been done on relaxing the assumption of known project life. This paper proposes a framework to include the assumption of uncertain project life and future cash flows in cost‐benefit decision making. The method follows from some known techniques from the actuarial literature that to a large extent is underappreciated in cost‐benefit analysis.