Abstract
The concept of evaluating capital budgeting projects on the basis of a discounted cash-flow analysis is well established in both the academicians’ and the practitioners’ worlds [4, 9,13]. However, for purposes of simplification the suggested procedures often are based on a set of unrealistic assumptions. For example, a project’s life (N) often is assumed to be a constant, that is, known with certainty, whereas in reality it is stochastic. The stochastic nature of a project’s life may be due to competitive technological advances, changes in consumer tastes and preferences, and the impact of complementary projects. The consequences of incorrectly assuming that N is a constant are unknown. However, as shown in the following section, the mean and variance of the net present value (NPV) distribution are biased if N is assumed to be a constant when in fact it is stochastic.
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© 1981 Martinus Nijhoff Publishing
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Bey, R.P. (1981). The Impact of Stochastic Project Lives on Capital Budgeting Decisions. In: Crum, R.L., Derkinderen, F.G.J. (eds) Capital Budgeting Under Conditions of Uncertainty. Nijenrode Studies in Business, vol 5. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-7408-4_4
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DOI: https://doi.org/10.1007/978-94-011-7408-4_4
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