Project Selection under Risk

Three methods for the selection of construction projects are presented including, weighted average cost of capital, portfolio approach, and market model approach. The weighted average cost of capital fails to consider the individual risk of projects, therefore modification is required. A new portfolio analysis and its implication in construction projects is presented. Standard deviation and expected value of net present value are considered to be an appropriate approach in portfolio analysis. Difficulty arises in evaluating the coefficient of correlation when the number of projects increases, and utility function of the decision maker that can be derived only under restricted conditions. The market model approach considers company, industry, and market related factors and in conjunction with experienced managerial judgment allows the most appropriate selection of projects. This model eliminated some of the difficulties of the portfolio approach.