The role of traditional discounted cash flows in the tragedy of the horizon: another inconvenient truth

Espinoza, David; Morris, Jeremy Wade; Baroud, Hiba; Bisogno, Marco; Cifuentes, Arturo; Gentzoglanis, Anastassios; Luccioni, L.; Rojo, Javier; Vahedifard, Farshid

doi:10.1007/s11027-019-09884-3

Cited by 7 publications

(2 citation statements)

References 39 publications

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“…Some argue that discounting is unavoidable (Belzer, 2000), while others point out that discounting consequence can result in policy choices that simply transfer risk rather than address it (Shrader‐Frechette, 2000). Discounting may lead to a low level of investment in long‐term risk treatment and adaptation options (Espinoza et al., 2020).…”

Section: Discussionmentioning

confidence: 99%

The Role of Time in Risk and Risk Analysis: Implications for Resilience, Sustainability, and Management

et al. 2021

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There is a persistent misconception that risk analysis is only suited for considering the immediate consequences of an event. Such a limitation would make risk analysis unsuitable for many challenges, including resilience, sustainability, and adaptation. Fortunately, there is no such limitation. However, this notion has stemmed from a lack of clarity regarding how time is considered in risk analysis and risk characterization. In this article, we discuss this issue and show that risk science provides concepts and frameworks that can appropriately address time. Ultimately, we propose an adjusted nomenclature for explicitly reflecting time in risk conceptualization and characterizations.

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Section: Discussionmentioning

confidence: 99%

The Role of Time in Risk and Risk Analysis: Implications for Resilience, Sustainability, and Management

et al. 2021

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“…In the traditional NPV method (and other classical methods already mentioned), the discount rate used to discount flows combines This Journal is licensed under a Creative Commons Attribution 4.0 International License the time value of money with the risk premium (Espinoza et al, 2019a). Unlike this, the DNPV method postulates a valuation methodology which separates the risk associated with a project from the value of money over time.…”

Section: Introductionmentioning

confidence: 99%

Evaluation of Investment Projects in Photovoltaic Solar Energy Using the DNPV Methodology

Martínez-Ruiz

Manotas-Duque

Ramírez-Malule

2020

IJEEP

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The evaluation of investment projects has been carried out mainly through the analysis of discounted cash flow (DCF), whose financial feasibility measures have been based fundamentally on approaches such as the net present value (NPV) and the internal rate of return (IRR), which are widely discussed in the field of energy project valuation. Despite this, the classical methods have a limitation when perceiving relevant characteristics for decision-making in high-risk investments, such as the uncertainty of the cash flows and the quantification of risk. An alternative to the use of these methods is the technique known as decoupled net present value (DNPV), which decouples the risk associated with the project from the value of money over time. This valuation methodology was applied to a photovoltaic solar energy self-generation project in Colombia. In this study, the results obtained through the DNPV was equivalent to 2.3-fold the value obtained by means of NPV. Thus, many renewable energy projects can become undervalued since traditional methods mistakenly associated a discount rate that includes a very high risk premium and that in many occasions it is more related to the sources of financing of the project instead of representing the risk component that it has.

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Fuzzy Risk Adjusted Discount Rate and Certainty Equivalent Methods

Kahraman,

Haktanır

2024

Fuzzy Investment Decision Making With Examples

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The role of traditional discounted cash flows in the tragedy of the horizon: another inconvenient truth

Cited by 7 publications

References 39 publications

The Role of Time in Risk and Risk Analysis: Implications for Resilience, Sustainability, and Management

The Role of Time in Risk and Risk Analysis: Implications for Resilience, Sustainability, and Management

Evaluation of Investment Projects in Photovoltaic Solar Energy Using the DNPV Methodology

Fuzzy Risk Adjusted Discount Rate and Certainty Equivalent Methods

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