Economic evaluation of investment projects under uncertainty: A probability theory perspective

Document Type : Article

Authors

Department of Industrial Engineering, Faculty of Engineering, University of Kashan, Kashan, Iran.

Abstract

In the current competitive economy, the investors are facing increased uncertainty while evaluating new investment projects. This uncertainty caused from existence of insufficient information, oscillating markets, unstable economic conditions, obsolescence of technology and so on, and hence uncertainty is inevitable in reality. In such conditions, the deterministic models, while easy to use, do not perfectly represent the real situations and might lead to misleading decisions. When the cash flows for an uncertain investment project, over a number of future periods, are discounted using the traditional deterministic approaches, it may not provide investors with an accurate estimation of the project value. Therefore, this paper utilizes the probability theory tools to derive closed-form probability distribution function (PDF) and related expressions of the net present worth (NPW), as a useful and frequently used criterion, for cost-benefit evaluation of projects. The random cash flows follow normal, uniform or exponential distributions in our analysis. The probability distribution function of the NPW is an important tool that helps investors to accurately estimate the probability of being economic for projects, and hence, it is important tool for investment decision-making under uncertainty.

Keywords

Main Subjects


References:

1. Cleland, D. and Ireland, L., Project Management:  Strategic Design and Implementation, New York: Mc-  Graw Hill (2002). 
2. Carlsson, C., Fuller, R., Heikkila, M., and Majlender,  P. A fuzzy approach to R&D project portfolio selection",  International Journal of Approximate Reasoning,  44(2), pp. 93{105 (2007).  3.  Chen, T., Zhang, J., and Lai, K. An integrated real  options evaluating model for information technology  projects under multiple risks", International Journal  of Project Management, 27(8), pp. 776{786 (2009). 4. Armaneri, O.,  Ozdagoglu, G., and Yal_cinkaya,  O. An  integrated decision support approach for project investors  in risky and uncertain environments", Journal  of Computational and Applied Mathematics, 234(8),  pp. 2530{2542 (2010). 5. Zhang, W.G., Me, Q., Lu, Q., and Xiao, W.L. Evaluating  methods of investment project and optimizing  models of portfolio selection in fuzzy uncertainty",  Computers and Industrial Engineering, 61(3), pp. 721{  728 (2011). 6. 
Hana_zadeh, P. and Latif, V. Robust net present  value", Mathematical and Computer Modelling, 54(1{  2), pp. 233{242 (2011).7. Wang, J. and Hwang, W.L. A fuzzy set approach for  R&D portfolio selection using a real options valuation  model", Omega, 35(3), pp. 247{257 (2007). 8. Zuojun, P., Yuhong, C., and Lei, S. Applied research  on improved fuzzy chance-constrained model in engineering  project comparison and selection", Procedia  Engineering, 12(1), pp. 184{190 (2011).9.
Ebrahimnejad, S., Mousavi, S., Tavakkoli-  Moghaddam, R., Hashemi, H., and Vahdani, B. A  novel two-phase group decision making approach for  construction project selection in a fuzzy environment",  Applied Mathematical Modelling, 36(9), pp. 4197{4217  (2011). 10. Chiang, T.A. and Che, Z.H. A fuzzy robust evaluation  model for selecting and ranking NPD projects using  Bayesian belief network and weight-restricted DEA",  468 H. Mokhtari et al./Scientia Iranica, Transactions E: Industrial Engineering 27 (2020) 448{468  Expert Systems with Applications, 37(11), pp. 7408{  7418 (2010).  11. Shakhsi-Niaei, M., Torabi, S., and Iranmanesh, S. A  comprehensive framework for project selection problem  under uncertainty and real-world constraints",  Computers & Industrial Engineering, 61(1), pp. 226{  237 (2011).  12. Huang, X. Optimal project selection with random  fuzzy parameters", International Journal Production  Economics, 106(2), pp. 513{522 (2007).  13. Naimi Sadigh, A. Mokhtari, H., Iranpoor, M., and  Ghomi, S.M.T. Cardinality constrained portfolio optimization  using a hybrid approach based on particle  swarm optimization and Hop_eld neural network",  Advanced Science Letters, 17(1), pp. 11{20 (2012).  14. Salmasnia, A., Mokhtari, H., and Abadi, I.N.K. A  robust scheduling of projects with time, cost, and  quality considerations", The International Journal  of Advanced Manufacturing Technology, 60(5{8), pp.  631{642 (2012).  15. Liu, M. and Wu, F.F. Portfolio optimization in  electricity markets", Electric Power Systems Research,  77(8), pp. 1000{1009 (2007).  16. Afshar-Nadja_, B., Parsanejad, A., Hajipour, V., and  Nobari, A. Solution procedure for generalized resource  investment problem with discounted cash ows  and progress payment", Scientia Iranica, 21(6), pp.  2436{2447 (2014).  17. R_ebiasz, B. and Macio l, A. Comparison of classical  multi-criteria decision amking methods with fuzzy  rule-based methods on the example of investment  projects evaluation", In Intelligent Decision Technologies,  pp. 549{561, Springer, Cham (2015).  18. Dai, C.Y., Wang, Y.X., Li, D., and Zhou, Y.L. Renewable  energy investment project evaluation model  based on improved real option", In Low-carbon City  and New-type Urbanization, pp. 43{53, Springer,  Berlin, Heidelberg (2015).  19. Kilic, M. and Kaya, _I. Investment project evaluation  by a decision making methodology based on type-2  fuzzy sets", Applied Soft Computing, 27(1), pp. 399{  410 (2015).  20. Kirkwood, L., Shehab, E., Baguley, P., and Starr,  A. Uncertainty of net present value calculations and  the impact on applying integrated maintenance approaches  to the UK rail industry", Procedia CIRP,  38(1), pp. 245{249 (2015).  21. Tabrizi, B.H., Torabi, S.A., and Ghaderi, S.F. A novel  project portfolio selection framework: An application  of fuzzy DEMATEL and multi-choice goal programming",  Scientia Iranica, 23(6), pp. 2945{2958 (2016).  22. Fathallahi, F. and Naja, A.A. A hybrid genetic  algorithm to maximize net present value of project  cash ows in resource-constrained project scheduling  problem with fuzzy parameters", Scientia Iranica,  23(4), pp. 1893{1903 (2016).  23. Dutta, G. and Ashtekar, M. A system dynamics  simulation model of a blast furnace for project evaluation",  International Journal of Business and Systems  Research, 11(3), pp. 325{343 (2017).  24. Etemadi, S., Koosha, H., and Salari, M. A goal programming  capital budgeting model under uncertainty  in construction industry", Scientia Iranica, 25(2), pp.  841{851 (2018).  25. Mohagheghi, V., Mousavi, S.M., Vahdani, B., and  Shahriari, M.R. R&D project evaluation and project  portfolio selection by a new interval type-2 fuzzy  optimization approach", Neural Computing and Applications,  28(12), pp. 3869{3888 (2017).  26. Awasthi, A. and Omrani, H. A scenario simulation  approach for sustainable mobility project evaluation  based on fuzzy cognitive maps", International Journal  of Modelling and Simulation, 38(4), pp. 1{11 (2018).  27. Montgomery, D.C. and Runger, G.C., Applied Statistics  and Probability for Engineers, New York: John  Wiley and Sons (2010).  28. Ross, S., A First Course in Probability, 7th Ed. Upper  Saddle River, NJ: Pearson (2005). 
Volume 27, Issue 1
Transactions on Industrial Engineering (E)
January and February 2020
Pages 448-468
  • Receive Date: 12 January 2018
  • Revise Date: 15 June 2018
  • Accept Date: 23 July 2018