Project Viability and Economic Risk Analysis

Abstract

In this paper an attempt is made to present a new concept for project appraisal and economic risk analysis. It is based on assessing the characteristics of the probability distribution of the unit cost. This approach is generally preferable to those based on net present value or internal rate of return and the like, which depend on the speculative forecasts of future prices and sales volumes. The feasibility of applying this concept is explored and demonstrated by inclusion of a realistic problem. Solutions have been derived using both deterministic and probabilistic approaches. These have been compared and discussed. Favorable projects will have a relatively low mean unit cost. They will also exhibit a small spread of the unit cost about the mean value. The economic risk may be evaluated by superimposing the distribution of the unit cost as well as the price lines (both current and the expected future) on the supply curve. The area under the distribution curve which lies above the price line is a measure of the risk of the project losing money.