Abstract: A Probability Distribution of Discounted Payback for Evaluating Investment Decisions

Abstract

By focusing attention on managers' concept of risk and the methods they use to measure risk, this paper attempts to lessen the disparity between current theory and practice by suggesting a method that will make IRR and NPV more generally applicable. We attempt to do this through a methodology that combines some PERT assumptions with traditionally accepted academic techniques and those used by practicing business managers to provide a probability distribution of the cumulative net present value (CPV). From these data we develop a probability distribution of the discounted payback period.