A mid-point based decision making method for the assessment of investments and companies

Abstract

[eng] In decision-making, we face a situation where we have to decide whether it is worth to perform an investment or not. The Net Present Value gives as an idea of the profit that will produce our investment over a series of time periods of a fixed time horizon. Its computation begins with some data or variables from which we can obtain a cash flow for each time period under consideration. This study is going to focus on the variables that can take values in an interval of possibilities whose endpoints are its pessimistic forecast (PF) and the optimistic one (OF). Now, we are in front of infinite different possible forecasts, all those values between the endpoints, and the expert in charge needs to determine which data is more appropriate among them in order to make the final decision. This study proposes several analytical techniques based on the use of midpoints to select one among this infinite range. Firstly, our purpose is to show that, in addition to the mean, there are many other options to set the aforementioned intermediate value which allow us to get net present values that can be considered as reasonable as forecast. Concretely, we introduce the so-called aggregation functions as a mathematical tool for computing the mid-way forecast and a methodology based on them for computing NPVs. Secondly, two new methodologies are proposed. Both of them incorporate a penalization for the elapsed time and for the discrepancy between PF and OF in order to generate each flow involved in the computation of the NPV. All methodologies are tested applying them to a practical example where real data is considered and the NPV of a five-year hotel assessment is computed.