Measuring Risk in Investment Projects: NPV at Risk

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NPV is based on the discount of expected, future cash flows. As such, it is subject to substantial uncertainty in real applications. This uncertainty is often neglected in some companies due to a lack of appropriate tools to manage it. One way to account for all the risk associated with a particular investment project is to use the probability distribution associated with the NPV (NPVAR), once the main uncertainties have been identified and measured. We explain how this analysis can be done in a very simple way. This note is based on the note with the same title from the same author, ADN-280, 2015.
Bibliographic citation: GARCÍA-CASTRO, R. (2021). Measuring Risk in Investment Projects: NPV at Risk. IESE, ADN-286-E.
Date: 01/12/2021
Author(s): Roberto García-Castro
Document type: Technical Note
Department: Managerial Decision Sciences
Languages: English
Learning objective This note can be used to illustrate how NPV can be applied to highly uncertain investment projects.