(Number 12 / Autumn 2003)
When analyzing a set of investment decisions or options within an investment project, it often
seems natural to analyze each potential choice on an individual basis. This approach, however, ignores the interaction
between the various choices. The best course of action, when each choice is analyzed independently, may not be the same
as when the full spectrum of choices is analyzed together.
(Number 11 / Spring 2003)
Strategy and the State Framework
The state framework provides a very powerful and efficient way to analyze strategies and, in fact,
to determine the optimal strategy in a wide range of applications.
(Number 10 / Spring 2002)
Powerful Pricing Project
Pricing of a project fundamentally rests on evaluation of the cash flows that the project will
generate. If these cash flows are known with certainty at the time of project conception the value of the project can
be determined by a discounted cash flow analysis.
(Number 9 / Fall 2001)
Decisions based on proper valuation methods can account for a significant fraction (often 30% or
more) of the total value of the project. Indeed, infrastructure projects are projects where Investment Science has
tremendous potential, for it can save the equivalent of billions of dollars in a single large project.
(Number 8 / Spring 2001)
In this short discussion, we will sketch a few layers of options theory, with emphasis on how the
theory relates to business issues and how it is becoming more general.
(Number 7 / Fall 2000)
Price Cycles in Competitive Capital-Intensive Industries
Capacity planning becomes easier, however, if we understand the fundamental causes of cyclicality.
With this knowledge we can devise a capacity planning strategy that takes advantage of good opportunities and minimizes
mistakes during especially difficult times.
(Number 6 / Spring 2000)
The Option to Wait
It has long been understood that the option to wait, or to delay, can have significant value
because new information may become available or circumstances may change. However, as shown here, the option to wait
may have substantial value even when all information is known and circumstances change only in a predictable and steady
manner. One should always consider the option to wait.
(Number 5 / Fall 1999)
How To (and How Not To) Measure Correlation
A project's real value depends on the project's cash flows and on how those cash flows are
statistically related to market variables. It is, therefore, important to understand how to estimate the relevant
statistical relations, and we review the basics here because beginning students often do it incorrectly, leading to
large errors in valuation.
(Number 4 / Spring 1999)
Risk-Time Discounting describes a most general method of discounting, capable of handling options
and other decision-oriented structures in projects. This method is still simple to understand and simple to implement.
In some respects it builds on the two-rate method, but it can handle complex cash flows that are subject to saturation,
curtailment, expansions, options, and other nonlinearities.
(Number 3 / Fall 1998)
The Two-Rate Method of Discounting
One of the simplest ways to improve conventional discounted cash flow analysis of projects is to
use two discount rates instead of one. The method is intuitive, simple to implement, and in some cases can give vastly
improved results compared to using a single rate. Very often, projects will be found to be less attractive when
properly analyzed than when a single discount rate is used.
(Number 2 / Spring 1998)
Why Discount at the Risk-Free Rate?
In conversations with business people and participants in the short course, we teach that the cash
flows of small risky projects should be discounted at the risk-free rate provided that the risk is private risk, not
related to market variables. Of course, most projects have both market and private risk, but still, the portion of the
cash flow due to private risk should be discounted at the risk-free rate -- that is what we teach.
(Number 1 / Fall 1997)
Pricing the Future
There are a number of methods that can be used to find an appropriate value, depending on the
relation of the cash flow to existing markets. In this article we discuss some of the simplest methods, which apply
when suitable markets are present.