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BRILLIANT’S Analysis of Risk and Uncertainty in Investment Decisions 465

consistent because they depend on the na {Z^©a H$aVo h¢Ÿ& Bg{bE BZ H$moB{\${eE§Q²>g Ho$
perception of investors. Therefore, the AmYma na {ZYm©[aV {H$E JE {ZîH$fm] na h_oem àíZ
conclusions based on such coefficients are
open to question. {MÝh ahVm h¡Ÿ&
2. It does not directly use the probability 2. `h EàmoM gå^m{dV H¡$e âbmoO Ho$ àmo~o{~{bQ>r
distribution of possible cashflows which {S>ñQ´>rã`yeZ H$m grYo à`moJ Zht H$aVr {OgHo$ H$maU
makes it difficult to calculate. BgH$s JUZm H${R>Z hmo OmVr h¡Ÿ&
Why Certainty Equivalent Approach is gQ>}ÝQ>r BpŠdd¡boÝQ> EàmoM, [añH$ ES>OoñQ>oS>
Superior to Risk Adjusted Discount Rate {S>ñH$mCÝQ> aoQ> EàmoM go ~ohVa Š`m| h¢?
Approach?
Despite the above limitations, the certainty Cnamoº$ gr_mAm| Ho$ ~mdOyX, gQ>}ÝQ>r B{Šdd¡boÝQ> EàmoM
equivalent approach is theoretically superior H$mo [añH$ ES>OoñQ>oS> {S>ñH$mCÝQ> aoQ> EàmoM H$s VwbZm _|
to the risk adjusted discount rate approach be- Ï`moao{Q>H$br ~ohVa _mZm OmVm h¡ Š`m|{H$ [añH$ ES>OoñQ>oS>
cause the risk adjusted discount rate method
implies that the risk increases over time when {S>ñH$mCÝQ> aoQ> _oWS> `h _mZVr h¡ {H$ g_` Ho$ gmW [añH$
the discount rate ‘K’ is constant. It may not be a ~‹T>Vr h¡ O~ {S>ñH$mCÝQ> aoQ> ‘K’ pñWa ahVm h¡Ÿ& `h
valid assumption for many projects where risk _mÝ`Vm ~hþV go àmoOoŠQ²>g na bmJy Zht hmoVr h¡ Ohm§
does not increase with the length of time in fu- ^{dî` _| g_` Ho$ gmW [añH$ Zht ~‹T>Vr h¡Ÿ& CXmhaU Ho$
ture. For example, an investment proposal like
tree plantation may be more risky in the initial {bE, d¥jmamonU àmoOoŠQ> _| BÝdoñQ>_oÝQ> H$aZo na àma§{^H$
years but when established, it may not be that dfm] _| [añH$ A{YH$ hmoVr h¡ {H$ÝVw EH$ ~ma ñWm{nV hmoZo
risky. In such circumstances, the assumption Ho$ níMmV² `h CVZm [añH$s Zht ah OmVmŸ& Eogr pñW{V`m|
that the risk increases with the length of time _| `h _mZZm {H$ g_` Ho$ gmW [añH$ gX¡d ~‹T>Vr OmVr h¡,
is not valid. On the other hand, with certainty C{MV àVrV Zht hmoVmŸ& Xygar Amoa, gQ>}ÝQ>r B{ŠddoboÝQ>
equivalent approach, the management is able
to specify directly the degree of risk for a par- EàmoM _| _¡ZoO_oÝQ> `h Xem© gH$Vm h¡ {H$ {H$gr n{Q>©Š`wba
ticular future period and then discount the â`yMa nr[a`S> _| [añH$ H$m ñVa Š`m hmoJm Am¡a Q>mB_ d¡ë`y
cashflow by using the time value of money. For Am°\$ _Zr H$m Cn`moJ H$aHo$ H¡$e âbmo H$mo {S>ñH$mC§Q> H$a
this reason, the certainty equivalent approach gH$Vm h¡Ÿ& Bg H$maU gQ>}ÝQ>r BpŠdd¡boÝQ> EàmoM, [añH$
is superior to the risk adjusted discount rate
method. ES>OoñQ>oS> {S>ñH$mCÝQ> aoQ> _oWS> go ~ohVa h¡Ÿ&
4. Sensitivity Analysis 4. gopÝg{Q>{dQ>r EZm{b{gg
An investment project is evaluated on the {H$gr BÝdoñQ>_oÝQ> àmoOoŠQ> H$m _yë`m§H$Z gå^m{dV H¡$e
basis of forecasted cash flows. The forecasted âbmoO Ho$ AmYma na {H$`m OmVm h¡Ÿ& g§^m{dV H¡$e âbmo
cash flows depend on different variables. For {d{^Þ do[aE~ëg na {Z^©a H$aVm h¡Ÿ& CXmhaU Ho$ {bE,
example, revenue depends upon sales volume aodoÝ`y, goëg dm°ë`y_ Ed§ goqbJ àmBg na {Z^©a hmoVm h¡Ÿ&
and selling price. The sales volume depends on
the market size and share of firm in market. goëg dm°ë`y_, _mH}$Q> gmBO Ed§ \$_© Ho$ _mH}$Q> eo`a na
Similarly, total costs depend on fixed and vari- {Z^©a H$aVm h¡Ÿ& Cgr àH$ma, Q>moQ>b H$m°ñQ>, {\$ŠñS> Ed§
able costs. The reliability of NPV and IRR of do[aE~b H$m°ñQ> na {S>noÝS> H$aVr h¡Ÿ& àmoOoŠQ> H$s NPV Ed§
the project will depend on the reliability of the IRR H$s {dídgZr`Vm, BZ do[aE~ëg Ho$ nydm©Zw_mZ H$s