Hawas, F and Cifuentes, A (2014) Valuation of projects with stochastic cash flows and intertemporal correlations: Practical modeling guidelines. Journal of Construction Engineering and Management, 140(6): 6014003, ISSN 0733-9364
Abstract
This paper explores the influence of cash-flow correlations on the behavior of the net present value (NPV) and internal rate of return (IRR) when performing valuations. In general, correlation has a negligible effect on the expected value of both the NPV and IRR. Even in cases of high correlation the IRR distribution departs very little from normality. In cases of moderate to low correlation, very good approximations of the SD of the NPV and IRR can be obtained, assuming that the cash flows are independent. These results, coupled with the simple two-parameter correlation structure investigated, provide a useful framework to perform valuation analysis of large-scale civil engineering projects.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | correlation; internal rate of return; net present value; quantitative methods; stochastic cash-flow; valuation |
| Index terms: | quantitative method, expected value, cash flow, modelling, net present value |
| Subjects: | statistical analysis, financial management, data analysis and analytics, analytical methods, economic analysis |
| Topics: | Research Practice, Engineering Principles, Cost Management, Business Strategy |
| Descriptive scope: | 4 PCTA |
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