Decision Making for Project Appraisal in Uncertain Environments: A Fuzzy-Possibilistic Approach of the Expanded NPV Method

Konstantinos A Chrysafis,Basil K Papadopoulos

doi:10.3390/sym13010027

Konstantinos A Chrysafis, Basil K Papadopoulos

Open Access

https://doi.org/10.3390/sym13010027

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Journal: Symmetry	Publication Date: Dec 25, 2020
Citations: 11	License type: CC BY 4.0

Affiliation: Democritus University of Thrace

Abstract

The major drawback of the classic approaches for project appraisal is the lack of the possibility to handle change requests during the project’s life cycle. This fact incorporates the concept of uncertainty in the estimation of this investment’s worth. To resolve this issue, the authors use fuzzy numbers, possibilistic moments of fuzzy numbers and the hybrid (fuzzy statistic) fuzzy estimators’ method in order to introduce a fuzzy possibilistic version of the expanded net present value method (FPeNPV). This approach consists of two factors: the fuzzy possibilistic NPV and the fuzzy option premium. For the estimation of the fuzzy NPV, some basic assumptions are taken into consideration: (1) the opportunity cost of capital, used as the present value interest factor calculated through the weighted average cost of capital (WACC), (2) the equity cost, determined through the possibilistic set-up of the capital asset pricing model CAPM, and (3) the inflation factor, also included in the estimation of the NPV. The fuzzy estimators’ method is used for the computation of the fuzzy option premium. An algorithm of nine major steps leads to the computation of the FPeNPV. This gives the administration the opportunity to adapt to potential changes in the company’s internal and external environments. In this way, the symmetry between the planning and execution phase of a project can be reinstated. The results validate the statement that fuzzy and intelligent methods remain valuable tools to express uncertainty in various scientific areas. Finally, an illustrative example aims at a thorough comprehension of this new approach of the expanded NPV method.

Highlights

The main concern for decision-making in project appraisal is the comparison between the future income and the initial cost
The net present value method approximates this challenge by forming a project portfolio that offers the maximum possible net present value (NPV) [1]
The fuzzy estimators method was employed as a risk aversion measure in the fuzzy possibilistic expanded net present value (FPeNPV), since it gave the choice of choosing the inteval range

Summary

Introduction

The main concern for decision-making in project appraisal is the comparison between the future income and the initial cost. The NPV and discounted cash flows (DCF). Methods do not provide project managers with the possibility of decisions made during the project’s life. Stochastic calculus models randomness, and the fuzzy sets theory models uncertainty. Project appraisal includes both stochastic and fuzzy parameters. A future cash flow depends on determinants that can be handled either as a fuzzy or random factor. This statement constitutes the main motivation for the inclusion of fuzzy modeling in project appraisal. The present research effort tackles the vague issue of project appraisal by employing the fuzzy version of the NPV method. Fuzzy sets constitute a reliable mathematical tool to model uncertainty and vagueness in fields such as engineering and finance [2]

Results

Discussion

Conclusion