Instead of calculating a discounted utility as we did in Problem 16.23, let us consider calculating U(NPV).
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Instead of calculating a “discounted” utility as we did in Problem 16.23, let us consider calculating U(NPV). That is, calculate NPV first, using an appropriate interest rate, and then calculate a utility value for the NPV. For your utility function, use the exponential utility function U (NPV) = 1 – e –NPV=5000. Use this approach to calculate the expected utility of Projects A and B in Figure 16.15. Which would you choose? Are there any problems with using this procedure for evaluating projects?
Figure 16.15
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Making Hard Decisions with decision tools
ISBN: 978-0538797573
3rd edition
Authors: Robert Clemen, Terence Reilly
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