Axis Journal of Mathematical Statistics and Modelling
Modeling Risks in Investment Appraisal with Simple Statistical Tools
Abstract
Enyi Patrick Enyi
This paper conducts a systematic investigation and critical evaluation of methodologies for integrating risk into investment appraisal and project planning. It underscores the premise that inadequate recognition or improper incorporation of risk factors within decision-making frameworks owing to the use of faulty models can materially undermine project viability. The desk research approach was adopted for this study using cash flow estimates relating to five sampled projects culled from the author’s work archive. The projects’ parameters were analyzed comparatively using discounted cash flow techniques (DCF) and risk metrics generated with Monte Carlo simulation, Mean-Relative Regression (MRR) analysis, and Enyi’s simplified statistical risk model, which also generated the risk distribution pattern around the mean of the cash flows. The results revealed that in addition to the difficulty in application, there were inconsistencies in the results produced by the more sophisticated models, while the risk distribution pattern introduced by Enyi’s simplified statistical risk model provides more explanatory direction for investment planning and project appraisal decision makers.