The appraisal or the feasibility of an engineering venture or an investment relies on the estimation of the analysis parameters, which usually occur in the future. All such estimates have an element of uncertainty which needs to be acknowledged. Traditional methods of engineering economic or discounted cash flow analysis, for example, net present value, benefit/cost ratio, internal rate of return and payback period, do not take into account the uncertainty associated with the analysis parameters. To this end, the present study proposes a number of evaluation methodologies in order to deal with the inherent uncertainty. The present study uses second-order moment thinking to determine the expected value and the variance of feasibility measures, net present value, benefit/cost ratio, internal rate of return and payback period. A venture???s feasibility is defined in this study as the probability of the total benefit exceeding the total cost, the probability of the internal rate of return being greater than a specified interest rate, or the probability of the payback period being less than a specified time period. However, the determination of the variance of these measures requires the estimation of the correlation coefficients between the benefits and costs. The task of estimating correlation coefficients is difficult without making certain assumptions. An examination of the degree of correlation is presented which can be used for guidance in feasibility studies. The present study also gives a theoretical formulation for feasibility for single and multiple ventures and supports this with representative results based on case studies. Such a formulation resolves which combination of ventures is best from a viewpoint of feasibility. Additionally, venture appraisal is modelled as a system with Markov properties. When analysis parameters such as the interest rate, benefits and costs are defined as states, with the associated transition probabilities from one period of time to another, Markov chains can be used to estimate a venture???s feasibility. This provides further insight into the influence of variability in the analysis parameters, and provides the solution to the problem of the determination of the optimal policy, which maximises the expected net present value or the venture's feasibility over its life span. Markov chains provide further insights into the effect of the inter-temporal correlation coefficients on the variance of the net present value. When each state is taken to represent a different value of inter-temporal correlation coefficient, and consequently a different variance, it is possible to evaluate the venture's expected variance and the variance of the variance of the net present value, according to the transition probabilities associated with each state.
| Identifer | oai:union.ndltd.org:ADTP/272555 |
| Date | January 2009 |
| Creators | Johar, Khalid Lutfi, Civil & Environmental Engineering, Faculty of Engineering, UNSW |
| Publisher | Awarded by:University of New South Wales. Civil & Environmental Engineering |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | Copyright Johar Khalid Lutfi., http://unsworks.unsw.edu.au/copyright |
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