December 11, 2011

Expected Values and Risk of Project Revenues and Costs

For all business expenditure proposals, revenues and costs are estimated for the future years and hence they are subject to the laws of probability and sometimes one may not know even probabilities.

When probabilities can be assigned objectively or subjectively, expected values and risk measures can be calculated for revenues and expenditures and hence for summary measures like NPV and IRR.

Engineering economic analysis used probability calculations.

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