(An) evaluation of risky investment with random timing of cash inflows and outflows

Abstract

This study develops new methodologies to solve the economic risk problem that the cash inflows and outflows have random magnitude under random timing, with discrete cash flow profiles and continuous discount rate. When the cash flows and timings are mutually independent, i) the expected value and variance of the net present value are developed, ii) internal rate of return is provided to evaluate the future profitability for investment alternatives and select the alternatives and iii) selecting criteria for the investment alternatives is proposed. When the distributions of the cash inflows and outflows are not identical, it is shown how the expected value and variance are gained. Finally, when the correlation exists between the cash inflows and outflows, the expected value and variance are proposed.