dc.contributor.author | Emhjellen, Kjetil | |
dc.contributor.author | Emhjellen, Magne | |
dc.contributor.author | Osmundsen, Petter | |
dc.date.accessioned | 2006-07-05T08:50:39Z | |
dc.date.available | 2006-07-05T08:50:39Z | |
dc.date.issued | 2001-08 | |
dc.identifier.isbn | 82491015100 | |
dc.identifier.issn | 0803-4036 | |
dc.identifier.uri | http://hdl.handle.net/11250/164627 | |
dc.description.abstract | When evaluating new investment projects, oil companies traditionally use the discounted cashflow method. This method requires expected cashflows in the numerator and a risk adjusted required rate of return in the denominator in order to calculate net present value. The capital expenditure (CAPEX) of a project is one of the major cashflows used to calculate net present value. Usually the CAPEX is given by a single cost figure, with some indication of its probability distribution. In the oil industry and many other industries, it is a common practice to report a CAPEX that is the estimated 50/50 (median) CAPEX instead of the estimated expected (expected value) CAPEX. In this article we demonstrate how the practice of using a 50/50 (median) CAPEX, when the cost distributions are asymmetric, causes project valuation errors and therefore may lead to wrong investment decisions with acceptance of projects that have negative net present values. | en |
dc.format.extent | 82760 bytes | |
dc.format.mimetype | application/pdf | |
dc.language.iso | eng | en |
dc.publisher | SNF | en |
dc.relation.ispartofseries | Report | en |
dc.relation.ispartofseries | 2001:30 | en |
dc.subject | investment decision | en |
dc.subject | expected value | en |
dc.subject | construction cost estimation | en |
dc.subject | capital expenditures | en |
dc.subject | probability distribution of CAPEX | en |
dc.title | Cost estimates and investment decisions | en |
dc.type | Research report | en |