ABSTRACT

The comparison of investment alternatives, so far, has been made under the implicit assumption that the future cash flows of each investment were certain to occur as forecasted. As noted in Chapter 3, the outcome of an investment can never be certain because its cash flows are subject to many factors, some of which are impossible to forecast, or even anticipate. Events such as recessions and depressions, international conflicts, the sudden rise or collapse of commodity prices, natural disasters, and technological change exert enormous influence on the economy, industries, and markets. Consequently, when firms make investments to expend capacity and introduce new products or services they do so under risk.