Introduction to Management Economic Decision Theory and Risk Analysis

Abstract

Except for the introductory discussion of risk–return fundamentals in Sect. 12.1, discounted cash flow analyses have assumed that estimates of future cash flows are known with certainty. This is never the case in applied engineering economic analyses. Macroeconomic, business economic, and organizational internal variables induce structural and random variation in future cash flow outcomes. Hence, it is essential that the engineering manager accounts for the riskiness of structural and random variation in future cash flow estimates and report probabilities of not achieving required returns on organizational investments.