Getting the Sums Wrong

  • Ricardo G. Barcelona


Not being mindful of the energy market’s inherent volatilities, capital budgeting assumes a well-ordered world that conforms to the preference of net present value (NPV) for predictable payoffs. Using the examples of coal-mining and power generation, this chapter presents the sad reality: when volatilities are explicitly considered, NPV’s carefully crafted “pecking order” falls apart, so that expected payoffs are seldom achieved. This trap could be avoided if managers were reacquainted with uncertainties and risk-taking. This chapter connects managerial actions and their financial consequences. Consequently, the ability to adapt or reverse commitments when conditions change is bound to have value.


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Copyright information

© The Author(s) 2017

Authors and Affiliations

  1. 1.IESE Business SchoolUniversity of NavarraBarcelonaSpain

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