Combination of survival probabilities of the components in a system. An application to long-term financial valuation
Keywords:
Combination, discounting function, (cumulative) instantaneous discount rate, Net Present Value, investment project.Abstract
The Net Present Value (NPV) is a well-known method to value an investment project. Nevertheless, this methodology exhibits a serious problem when the used discounting function decreases very rapidly, especially in (very) long-term projects, because the future cash-flows are not significant in the expression of the NPV. For this reason, this paper introduces a methodology to correct the discounting function used for valuing. To do this, a new operation between discounting functions is defined by reducing the (cumulative) instantaneous discount rate corresponding of the valuing discounting function with another appropriate discounting function. The result is a new discounting function which can be more adequate to value this class of investment projects.References
Barlow R.E. and Proschan F. (1996) Mathematical Theory of Reliability, SIAM, New York
Cruz Rambaud S. and Muñoz Torrecillas M.J. (2005) Some considerations on the social discount rate, Environmental Science and Policy, 8(4), 343-355
Cruz Rambaud S. and Muñoz Torrecillas M.J. (2007) Obtención de la tasa social de descuento a partir de la tasa de fallo de una distribución estadística: aplicación empírica, Estudios de Economía Aplicada, 25(1), 49-82
Gil Peláez L. (1993) Matemática de las Operaciones Financieras, Ed. AC, Madrid
Harvey C.M. (1986) Value functions for infinite-period planning, Management Science, 32, 1123-1139
Harvey C.M. (1994) The reasonableness of non-constant discounting, Journal of Public Economics, 53, 31-51
Maravall D. (1970) Matemática Financiera, Ed. Dossat, Madrid
Downloads
Published
Issue
Section
License
This journal provides immediate open access to its content on the principle that making research freely available to the public supports a greater global exchange of knowledge. The journal is committed to real and immediate open access for academic work. All of the journal articles are free to access immediately from the date of publication. There are no charge for readers to download articles and reviews for their own scholarly use. Benefits of open access for authors, include:
- Free access for all users worldwide
- Increased visibility and readership
- Rapid publication
- No spatial constraints
- Authors can share their research papers on their personal web-pages (i.e. ResearchGate, etc.)
Ratio Mathematica publishes open access articles under the terms of the Creative Commons Attribution (CC BY) License. The Creative Commons Attribution License (CC-BY) allows users to copy, distribute and transmit an article, adapt the article and make commercial use of the article. The CC BY license permits commercial and non-commercial re-use of an open access article, as long as the author is properly attributed. Copyright on any research article published by Ratio Mathematica is retained by the author(s). Authors grant Ratio Mathematica a license to publish the article and identify itself as the original publisher. Authors also grant any third party the right to use the article freely as long as its original authors, citation details and publisher are identified.
For further information visit: https://creativecommons.org/licenses/by/3.0/. The following logo will appear in any paper that will be published from the volume number 31/2016 onwards.
