Analysis of correlated risky cash flow

In the analysis of a single cash-flow profile under risk, between-period dependency among cash flows raises considerable difficulty in the evaluation of the profile’s net present value. It is assumed in this paper that the cash-flow profile exhibits a first-order autoregressive time-series structure, with the trend of the AR(1) process being a deterministic AR(1) in itself. The relevant parameters, however, are unknown. It is also assumed that the estimates of the cash-flow in every period are available. Applying an ‘error-in-variable’ analysis on the estimates, the relevant parameters of the time-series model are derived. This then allows the mean and variance of the profile’s NPV to be subsequently evaluated.