Evaluating income streams: A decision analysis approach

Evaluating income streams: A decision analysis approach

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Article ID: iaor2000625
Country: United States
Volume: 44
Issue: 12, Part 1
Publication Date: Dec 1998
Journal: Management Science
Authors:
Keywords: financial, risk
Abstract:

Most important decision problems – virtually all capital investments and planning situations – involve risky cash flows with uncertainties that are resolved over time. In most of these problems, the decision-maker has access to financial markets and may borrow and lend to smooth consumption over time. Yet, because of the difficulty of incorporating these borrowing and lending decisions into the evaluation models, these opportunities are rarely explicitly modeled in decision and risk analyses of these investments. In this paper, we study the errors induced by failing to account for these borrowing and lending decisions, and we develop extensions to the standard decision and risk analysis procedures that, given certain market and preference assumptions, take these borrowing and lending opportunities into account without overburdening the evaluation models.

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