Oceňování 2019, 12(2):29-48 | DOI: 10.18267/j.ocenovani.230

Estimating Present Value of Expected Expenditures in the Context of the Valuation of Negative Risk Cash Flows Using the RADR and Certainty Equivalent Methods

Vojtěch Menzl
Ing. Vojtěch Menzl, M. Sc., doktorand, Vysoká škola ekonomická v Praze, Fakulta financí a účetnictví, Katedra financí a oceňování podniku, nám. W. Churchilla 4, 130 67 Praha 3, Česká republika

The presented paper aims to point at the broader context of valuation using the methods of risk-adjusted discount rates (RADR) and certainty equivalents (CE), respectively, when dealing with negative risk cash flows. The article discusses different concepts of risk and uncertainty, presents an overview of the research (literature) on risk adjustment and discounting methods applicable on future uncertain cash flows published over the past 50+ years, and also addresses how the methods of certainty equivalents and risk-adjusted discount rates interlink and relate to the concept of utility function. The article concludes with a call for caution and critical view when the universally adopted RADR method is applied in valuation of negative risk cash flows (expenditures).

Keywords: RADR; certainty equivalent method; CAPM; beta coefficient; utility function; risk; risk-free discount rate
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Článek je zpracován jako jeden z výstupů projektu IGA VŠE Nové výzvy Corporate Finance v České republice pod číslem IG104029G.

JEL classification: D81, G11, G30, O12

Published: October 25, 2019  Show citation

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Menzl, V. (2019). Estimating Present Value of Expected Expenditures in the Context of the Valuation of Negative Risk Cash Flows Using the RADR and Certainty Equivalent Methods. Oceňování, 12(2), 29-48. doi: 10.18267/j.ocenovani.230
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