A probabilistic approach to the evaluation of risk-related investments with reference to their location in industrial development/ deconcentration points in South Africa

P N Palmer

doi:10.4102/sajbm.v17i2.1036

Abstract

The policy and programme for industrial decentralization in South Africa forms an integral part of South Africa's total economic development strategy for the future. Therefore, in the wake of South Africa's revised regional economic development proposals - which have resulted in the introduction of predominantly cash-based industrial decentralization incentives relative to their predominantly tax-based precursors - the author purports to outline the tenets underlying a probabilistic approach to the evaluation of risk-related investments with reference to their location in industrial development/deconcentration points in South Africa. To this end, the author seeks to illustrate that in evaluating capital investment proposals - within the context of regional decentralization - cash flow streams are one of the principal determinants of project worth in the analytical process. Moreover, although much of contemporary capital budgeting work is based on assumed 'conditions of certainty' a probabilistic approach to cash flow formulations is adopted in this article in the conviction that this affords considerably more insight into the problems of project evaluation and optimal selection.

Highlights

Die nywerheidsdesentralisasiebeleid en -program in Suid-Afrika is 'n integrale deel van Suid-Afrika se algehele ekonomieseontwikkelingstrategie vir die toekoms
Incentives vary within demarcated regions at different development points and consistently favour the development points located in the National States
These probability distributions can, it is submitted, provide management with valuable information in analysing the consequences of a proposed regionally decentrali~ investment. Management may use these results in ranking such investment proposals. This is because the mean and variance of the NPVn distribution are most important in the evaluation of a series of cash flows, which are peculiar to capital investment proposals in the context of regional decentraliz.ation

Summary

Introduction

Die nywerheidsdesentralisasiebeleid en -program in Suid-Afrika is 'n integrale deel van Suid-Afrika se algehele ekonomieseontwikkelingstrategie vir die toekoms. Estimation of sales cash flow Given that the total size of the initial market and its growth rate, designated S1, and S3 in Appendix A, are both random variables (which are assumed to be independent) the use of equations (10) and (11) yields the mean (ri) and standard deviation (o) of the market size in any time period as inferred from the range of values stipulated in Appendix A.

Results

Conclusion