The Evaluation of Risk in Marine Capital Investments

Abstract

Future costs and revenues in capital investment opportunities can seldom be predicted with certainty. As a result, there is usually some doubt as to the outcome of an investment. The chance that an investment may not prove profitable represents the investor's risk. This paper considers the problems which uncertainty and risk present in the evaluation of capital investments. Several traditional methods of dealing with uncertainty and risk are considered and shown to be deficient. A relatively new evaluation technique, which utilizes probability theory and computer simulation, is then described and its advantages highlighted. It is suggested that this technique will prove valuable in the evaluation of future marine capital investments.