Chapter 5

Risk and Uncertainty

A typical capital investment project evaluation requires many input variables including, inter alia, sales revenues, operating expenditure, project life, interest rates, and residual values. Some of these variables may be estimated with a relatively high degree of confidence, whereas others may exhibit high levels of uncertainty. The degree of uncertainty is also likely to be a function of both the type of project and the industry within which the firm operates. For example, investments of a strategic nature are generally more problematic for industry sectors such as oil and gas.

Large, capital-intensive projects in the oil and gas industries require substantial—and mostly risky—investments in the acquisition, ...

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