One in the eyes of the scholars and the other in the eyes of the practitioners: In the eyes of the scholar, Brigham & Ehrhardt (2022) believe Net Present Value (NPV) is a technique used to assess the viability of projects based on the projected receipts and disbursements over the projects' planning horizons. However, it can become difficult to arrive at credible single-point estimates for some of these cash flows. For example, project complexity increases, planning horizons, and the need to engage multiple subcontractors are all factors that increase the risk of developing an accurate NPV.

 

Brigham &  Ehrhardt (2022) argue that one approach to address this problem in the eye of practitioners is to incorporate the risks associated with each of these factors into the decision-making process to arrive at a project NPV. There are several methods for dealing with uncertainty and risk in financial models. For example, one of these methods is the Monte Carlo simulation, which uses random sampling of input (independent) parameters to model uncertainty.

 Does this model explore methodology or address the risk of developing NPVs for complex projects?

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The model presented in the discussion explores both methodology and addresses the risk of developing ... View the full answer