Abstract
This paper presents a method for determining optimal decision under ‘uncertainty’ situations. A simple algorithm is developed to establish the probability function of all the input variables. The application of this algorithm is illustrated through an equipment justification example. Four variables-investment, life, salvage value and net annual cash flows-are used to analyze the desirability of investing in the equipment. The probability functions for each variable are obtained using the algorithm. Once the probability functions are determined, simulation is used to obtain the expected value and variance of the net present value. The expected value and the variance of net present value is used to establish the desirability of the investment.
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