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Capital-Budgeting Decisions Involving Combinations of Risky Investments

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  • James Van Horne

    (Graduate School of Business, Stanford University)

Abstract

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.

Suggested Citation

  • James Van Horne, 1966. "Capital-Budgeting Decisions Involving Combinations of Risky Investments," Management Science, INFORMS, vol. 13(2), pages 84-92, October.
    • Handle: RePEc:inm:ormnsc:v:13:y:1966:i:2:p:b84-b92
    DOI: 10.1287/mnsc.13.2.B84
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    Cited by:

    1. Peter Brusov & Tatiana Filatova & Natali Orekhova, 2023. "Capital Structure Theory: Past, Present, Future," Springer Books, in: The Brusov–Filatova–Orekhova Theory of Capital Structure, chapter 0, pages 9-50, Springer.
    2. Marcin Dec, 2021. "From point through density valuation to individual risk assessment in the discounted cash flows method," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5621-5635, October.
    3. Marcin Dec, 2019. "From point through density valuation to individual risk assessment in the discounted cash flows method," GRAPE Working Papers 35, GRAPE Group for Research in Applied Economics.
    4. Creemers, Stefan, 2018. "Moments and distribution of the net present value of a serial project," European Journal of Operational Research, Elsevier, vol. 267(3), pages 835-848.
    5. Borgonovo, Emanuele & Gatti, Stefano, 2013. "Risk analysis with contractual default. Does covenant breach matter?," European Journal of Operational Research, Elsevier, vol. 230(2), pages 431-443.
    6. Lefley, Frank, 1997. "Approaches to risk and uncertainty in the appraisal of new technology capital projects," International Journal of Production Economics, Elsevier, vol. 53(1), pages 21-33, November.

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