Valuation of Projects with Stochastic Cash Flows and Intertemporal Correlations: Practical Modeling Guidelines
Publication: Journal of Construction Engineering and Management
Volume 140, Issue 6
Abstract
This paper explores the influence of cash-flow correlations on the behavior of the net present value (NPV) and internal rate of return (IRR) when performing valuations. In general, correlation has a negligible effect on the expected value of both the NPV and IRR. Even in cases of high correlation the IRR distribution departs very little from normality. In cases of moderate to low correlation, very good approximations of the SD of the NPV and IRR can be obtained, assuming that the cash flows are independent. These results, coupled with the simple two-parameter correlation structure investigated, provide a useful framework to perform valuation analysis of large-scale civil engineering projects.
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Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 140 • Issue 6 • June 2014
Copyright
© 2014 American Society of Civil Engineers.
History
Received: Aug 7, 2013
Accepted: Jan 26, 2014
Published online: Feb 24, 2014
Published in print: Jun 1, 2014
Discussion open until: Jul 24, 2014
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