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| Author: | Benzion, U. Yagil, J. |
| Title: | On the discounting formula for a stream of independent riski cash flow. |
| Journal: | Engineering Economist
1987 : SUMMER, VOL. 32:4, p. 337-345 |
| Index terms: | DISCOUNTED CASH FLOW RISK MANAGEMENT CASH FLOW INVESTMENT |
| Language: | eng |
| Abstract: | Among the various methods for treating risk discussed intensively in the finance literature are the certainty equivalent method and the risk-adjusted discount rate method. These two methods for evaluating multi-period stochastic income streams that are identical and independent over time are compared. They are based on the "signal risk adjusted discount factor" (SRADF), and the "certainty equivalent discount factor" (CEDF), which involve two alternative assumptions regarding the time pattern of the exchange rate between the risky and riskless income streams. The SRADF formula tends to produce a bias in favor of short-term projects and against long-term ones, so the combination of the two formulas is suggested. |
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