Abstract
IN A RECENT ARTICLE in this Journal, Brief and Owen [2] indicated how the coeffident of variation might formally enter into the evaluation of risky projects by considering the rate of return as a random variable. They use the coefficient of variation of the distribution of future cash flows as a measure of earnings risk and find a formal mechanism for relating the coefficient to risk in the world of uncertainty. However, if the distribution of future cash flows is asymmetrical, higher moments may have significant values. Thus, in the case of capital budgeting, skewness in the direction of undesirable returns, i.e., less than average, is particularly important in the evaluation of projects. Since Arditti [1] concludedthat the second and third moments of the probability distribution are reasonable risk measures, Brief and Owen's model can be extended to include the third moment. Defining C as the cost of capital, X as the net cash flows before deducting C, r as the rate of return on cost, and s as the rate of return on net cash flows, we have
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