Analysis of capital expenditure projects with uncertain discrete cash flows

In this paper, a methodology is presented for evaluating risky projects whose cash flows, start times and durations are not known with certainty. The methodology directly computes statistics of the present worth (i.e. means and variances) from closed-form analytical formulas which are derived with explicit consideration of the risks associated with the individual variables that affect the profitability index of the projects. It is assumed that the cash flows occur discretely over time and that a fixed discount rate exists over the project duration. The application of the technique is demonstrated through systematic steps on a number of example problems.