Equation of Value Flashcards
1
Q
How would you estimate the probability
A
estimated by considering experience of similar cashflows
if there is a lack of data to determine an accurate prob, you can use approximate probabilities or likelihood
2
Q
Describe how an equation of value can be adjusted to allow for uncertain receipts and payments
A
apply a probability of payment or receipts to the cashflow at each time
use a higher rate of discount
3
Q
What if the uncertainty of the probability could have dire financial consequences §
A
use sensitivity analysis, this involves calculations performed using possible values for likelihood and the amount of cashflows
a stochastic approach could be used to indicate possible outcomes
