Investment decisions often require a thorough analysis of the potential costs and benefits. For this purpose it is customary to compose a cash flow outlook. Of course, the projected cash surpluses are highly dependent upon the input assumptions. There will be risks and uncertainties that are not reflected in a single outlook.
Accounting for risk is often done by discounting the cash flow using a rate that is assumed to reflect the risk level associated with the targeted investment. At Claridec we do not support this approach. Instead, more clarity is achieved if the costs and benefits are described as ranges of uncertainty. This leads to a probabilistic approach which may sound more daunting than it actually is. The discount factor then only serves to account for the time value of money.