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Estimating Present Value of Expected Expenditures in the Context of the Valuation of Negative Risk Cash Flows Using the RADR and Certainty Equivalent Methods
[Odhad současné hodnoty očekávaných výdajů v kontextu ocenění záporných rizikových peněžních toků metodami RADR a jistotních ekvivalentů CE]

Author

Listed:
  • Vojtěch Menzl

Abstract

The presented paper aims to point at the broader context of valuation using the methods of risk-adjusted discount rates (RADR) and certainty equivalents (CE), respectively, when dealing with negative risk cash flows. The article discusses different concepts of risk and uncertainty, presents an overview of the research (literature) on risk adjustment and discounting methods applicable on future uncertain cash flows published over the past 50+ years, and also addresses how the methods of certainty equivalents and risk-adjusted discount rates interlink and relate to the concept of utility function. The article concludes with a call for caution and critical view when the universally adopted RADR method is applied in valuation of negative risk cash flows (expenditures).

Suggested Citation

  • Vojtěch Menzl, 2019. "Estimating Present Value of Expected Expenditures in the Context of the Valuation of Negative Risk Cash Flows Using the RADR and Certainty Equivalent Methods [Odhad současné hodnoty očekávaných výd," Oceňování, Prague University of Economics and Business, vol. 12(2), pages 29-48.
    • Handle: RePEc:prg:jnloce:v:12:y:2019:i:2:id:2019_2_03:p:29-48
    DOI: 10.18267/j.ocenovani.230
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    References listed on IDEAS

    as
    1. William L. Beedles, 1978. "On The Use Of Certainty Equivalent Factors As Risk Proxies," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 1(1), pages 15-21, December.
    2. Booth, Laurence D., 1982. "Correct Procedures for the Evaluation of Risky Cash Outflows," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(2), pages 287-300, June.
    3. Lewellen, Wilbur G, 1977. "Some Observations on Risk-Adjusted Discount Rates," Journal of Finance, American Finance Association, vol. 32(4), pages 1331-1337, September.
    4. Miles, James & Choi, Dosoung, 1979. "Comment: Evaluating Negative Benefits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(5), pages 1095-1099, December.
    5. Estrada, Javier, 2007. "Mean-semivariance behavior: Downside risk and capital asset pricing," International Review of Economics & Finance, Elsevier, vol. 16(2), pages 169-185.
    6. Machol, Robert E. & Lerner, Eugene M., 1969. "Risk, Ruin and Investment Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(4), pages 473-492, December.
    7. Schall, Lawrence D, 1972. "Asset Valuation, Firm Investment, and Firm Diversification," The Journal of Business, University of Chicago Press, vol. 45(1), pages 11-28, January.
    8. Alexander A. Robichek & Stewart C. Myers, 1966. "Conceptual Problems In The Use Of Risk‐Adjusted Discount Rates," Journal of Finance, American Finance Association, vol. 21(4), pages 727-730, December.
    9. Gallagher, Timothy J & Zumwalt, J Kenton, 1991. "Risk-Adjusted Discount Rates Revisited," The Financial Review, Eastern Finance Association, vol. 26(1), pages 105-114, February.
    10. Bar-Yosef, Sasson & Mesznik, Roger, 1977. "On Some Definitional Problems with the Method of Certainty Equivalents," Journal of Finance, American Finance Association, vol. 32(5), pages 1729-1737, December.
    11. Celec, Stephen E & Pettway, Richard H, 1979. "Some Observations on Risk-Adjusted Discount Rates: A Comment," Journal of Finance, American Finance Association, vol. 34(4), pages 1061-1063, September.
    12. Beedles, William L., 1978. "Evaluating Negative Benefits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(1), pages 173-176, March.
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    More about this item

    Keywords

    RADR; certainty equivalent method; CAPM; beta coefficient; utility function; risk; risk-free discount rate; metoda jistotních ekvivalentů; koeficient beta; užitková funkce; riziko; bezriziková diskontní sazba;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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