Project Risk Analysis: Techniques for Measuring Stand-Alone Risk 317
The standard deviation of the NPV is $69,267 (in thousands of dollars):
$69,267.
B
0.25($146,180$30,135)^2 0.50($5,809 $30,135)^2
0.25($37,257$30,135)^2
NPV
Ba
n
i 1
Pi(NPViExpected NPV)^2
Capital Budgeting Practices in the Asia/Pacific Region
A recent survey of executives in Australia, Hong Kong, In-
donesia, Malaysia, the Philippines, and Singapore asked sev-
eral questions about their companies’ capital budgeting
practices. The study yielded some interesting results, which
are summarized here.
Techniques for Evaluating Corporate Projects
Consistent with evidence on U.S. companies, most compa-
nies in this region evaluate projects using IRR, NPV, and pay-
back. IRR use ranged from 86 percent (in Hong Kong) to 96
percent (in Australia). NPV use ranged from 81 percent (in
the Philippines) to 96 percent (in Australia). Payback use
ranged from 81 percent (in Indonesia) to 100 percent (in
Hong Kong and the Philippines).
Techniques for Estimating the Cost
of Equity Capital
Recall from Chapter 6 that three basic approaches can be
used to estimate the cost of equity: CAPM, dividend yield
plus growth rate (DCF), and cost of debt plus a risk pre-
mium. The use of these methods varied considerably from
country to country (see Table A).
We noted in Chapter 7 that the CAPM is used most
often by U.S. firms. (See the box in Chapter 7 entitled,
“Techniques Firms Use to Evaluate Corporate Projects”.)
Except for Australia, this is not the case for Asian/
Pacific firms, who instead more often use the other two
approaches.
Techniques for Assessing Risk
Finally, firms in these six countries rely heavily on scenario
and sensitivity analyses to assess project risk. They also use
decision trees and Monte Carlo simulation, but less fre-
quently than the other techniques (see Table B).
Source:From George W. Kester et al., “Capital Budgeting Practices in the
Asia-Pacific Region: Australia, Hong Kong, Indonesia, Malaysia, Philippines,
and Singapore,” Financial Practice and Education,vol. 9, no. 1, Spring/Summer
1999, 25–33. Reprinted by permission of Financial Management Association
International, University of South Florida.
TABLE A
Method Australia Hong Kong Indonesia Malaysia Philippines Singapore
CAPM 72.7% 26.9% 0.0% 6.2% 24.1% 17.0%
Dividend yield plus growth rate 16.4 53.8 33.3 50.0 34.5 42.6
Cost of debt plus risk premium 10.9 23.1 53.4 37.5 58.6 42.6
TABLE B
Risk Assessment Technique Australia Hong Kong Indonesia Malaysia Philippines Singapore
Scenario analysis 96% 100% 94% 80% 97% 90%
Sensitivity analysis 100 100 88 83 94 79
Decision tree analysis 44 58 50 37 33 46
Monte Carlo simulation 38 35 25 9 24 35
316 Cash Flow Estimation and Risk Analysis
