NPV-at-Risk Method in Infrastructure Project Investment Evaluation

TLDR

Strategic capital investment decisions are crucial, and privately financed infrastructure projects carry high financial, political, and market risks, yet existing methods focus on different factors and have limitations. The study aims to develop a more rigorous appraisal method that incorporates risk analysis for infrastructure investment decisions. By systematically classifying existing evaluation methods, the authors propose the NPV‑at‑risk method, which combines the weighted average cost of capital with dual risk‑return approaches. Testing two hypothetical power projects demonstrates that the NPV‑at‑risk method yields superior risk‑aware investment decisions for privately financed infrastructure projects.

Abstract

Strategic capital investment decisions are crucial to a business firm. The decision to invest in privately financed infrastructure projects requires careful consideration, because they are exposed to high levels of financial, political, and market risks. The project appraisal methods should incorporate analysis of these risks. A number of capital-investment decision methods can take risks into account, but each of them focuses on different factors and has its limitations. Thus, a more vigorous method is needed. A systematic classification of existing evaluation methods shows that it is possible to develop a new method—the net-present-value-at-risk (NPV-at-risk) method—by combining the weighted average cost of capital and dual risk-return methods. The evaluation of two hypothetical power projects shows that the NPV-at-risk method can provide a better decision for risk evaluation of, and investment in, privately financed infrastructure projects.