Project is a compound - not a mixture conceptual problems in valuation

Abstract

There is considerable literature in the field of finance concerning the valuation of negative cash flows. Consequently, it is widely held that a project should be valued by valuing each component of the project's cash inflows and outflows separately, either by discounting the cash flowing at appropriate RADRs or by using the certainty equivalent approach. This paper discusses the implicit inadequacies in using the above approach for project evaluation and recommends valuing the Net Cash Flow of the project either by using a single RADR or using the certainty equivalent framework.