INVESTMENT DECISIONS UNDER UNCERTAINTY AND EVALUATION OF AMERICAN OPTIONS

摘要

Capital projects evaluation and selection is an important problem in investment finance, and it is also of interest for actuarial science. A traditional approach to such investment is based on the net present value (NPV) concept, see Jorgensen (1963), Tobin (1969) and Kellison (1991). Nickel] (1978) and Abel (1990) provide detailed surveys of development of this approach. In order to make an investment decision about a single project, one should compute the NPV which is the difference between the present values of proceeds and expenditures related to the project and invest if this difference is positive. If there are several possible projects, an investor should consider all variants of investment and choose the one with the maximum NPV. Under this approach, there are issues that arise in calculating the NPV, in particular, how to take into account risks related to the projects, and what discount rate (or rates) should be used. The survey by Lewin et al. (1994) discusses these issues as well as an alternative method based on the internal rate of return.