Abstract

Abstract The manner in which the uncertainty associated with a prospective investment is resolved over the investment's life is an important consideration in judging the desirability of that investment. This paper presents a method for incorporating the idea of uncertainty resolution regarding an investment's flexibility with the traditional measures of investment worth, profitability and variability. The resulting investment criterion is a single index that is referred to as the Project Balance Criterion. To test the effectiveness of this new criterion for probabilistic cash flows, the Project Balance Criterion is compared to the traditional Mean-Variance criterion for a sequential decision process. This comparison is made for a number of different investment settings. In addition, the improvement in project selection that is possible when future cash flows are certain is contrasted with the results of applying the Project Balance Criterion to probabilistic cash flows.

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