Capital-Budgeting Decisions Involving Combinations of Risky Investments

In this paper, a method is proposed for evaluating combinations of investments when the cash flows are not known with certainty. Various probability concepts are employed; and combinations are evaluated according to their incremental contribution of expected net-present value and variance to the firm as a whole. It is shown that existing investment projects must be considered if the total risk of a particular combination of investment proposals is to be evaluated realistically. Through diversification of investments, a firm is able to obtain the most desirable combination of expected net-present value and risk.

• 저널Management Science · 13(2) · B–84
• 토픽Capital Investment and Risk Analysis · Finance
• DOI10.1287/mnsc.13.2.b84
• 저자James Van Horne