Risk Analysis of Project Feasibility Under Random Payment Delays

Abstract

Net present value has been widely used to evaluate project financial feasibility, along with the amount of risk associated with each alternative. Under certain assumptions, probabilistic information regarding cash flows and their timing can be used to account for the uncertainty surrounding the project.

In our research, we focused on time constrained investments, where cash flows might exceed their due date by a random period specified by the decision maker. For such projects, we derived closed form expression of the net present value distribution under different payment delays, for single period projects. For multiple-period cash inflows with identically distributed payment delays we provide analytical tools to fit suitable distribution to model NPV without relying on the time-consuming Monte Carlo simulation process.

Our aim is to provide an accurate estimation for the distribution of NPV of projects with most encountered payment delay distribution(uniform, triangular, PERT and exponential). This work enhances the decision-making process and provide investors and decisions makers a tool for evaluating the risk of delaying payment on project feasibility.