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The paper proposes using modified duration in calculating the proper risk-adjusted discount rate (RADR) to account for downside risk scenarios in capital budgeting.

The paper shows how to use modified duration to summarize in a single number the bidimensional information about the inflows and terms in which they are charged in the use of the RADR. If a short modified duration characterizes the project, that is, the most relevant inflows are charged in short times, then discounting at RADR has mild effects on net present value (NPV). Else, if a long modified duration characterizes the project, discounting at RADR may have severe effects on NPV. The study proves that RADR's effectiveness increases with the project's modified duration.

The study builds a bridge between the regular NPV method used in academia and the RADR method used in the managerial context by identifying the proper RADR that leads the same NPV risk-adjustments, whichever method is used by including modified duration into the analysis.

The results show how to select the proper RADR by reducing the subjectivity and increasing financial precision based on modified duration, thus providing an alternative to the norm. Simulations are used to make sensitivity analysis more effective and spotlight the main drivers in the risk-adjustments providing robust results.

This paper fulfils the gap between the RADR method and the expected net present value method by providing simple relations between the characteristic parameters.

Property investment risk is traditionally accounted for by valuers in a risk‐adjusted discount rate approach, although this term, popular in mainstream finance, is rarely used. This paper shows that RADR is but one of several risk adjustment techniques that may be employed within an explicit cash flow framework. It explains how a certainty equivalent technique may be used in an objective manner by use of standard deviation analysis, and develops a new technique for use in the UK prime market known as the sliced income approach. The paper goes further by setting risk adjustment (deterministic) techniques within the wider context of risk analysis and compares a simple probabilistic approach and sensitivity analysis with these techniques for use in property investment appraisal. A case study is employed in illustrations.

Capital Budgeting is defined as planning and financing long term investment projects in both the private and public sectors (Skierkowski, 1981). In the literature, there is a great deal of discussion about CB in the public sector (Bradley and Frey, 1979), as well as emphasis in the private sector (Murdick et.al., 1980). This paper concentrates on the private sector since it involves the profitability issue, which is strongly affected by CB decisions; although, many other CB issues are in common for both private and public sector organizations. Therefore, this study presents an integrated approach that can be applied to both profit as well as to non‐profit organizations.

The purpose of this paper is to examine the current trends of capital budgeting practices (analysis techniques, discount rate estimations and risk assessment methods) among Pakistani listed firms and analyze the responses conditional on firms’ demographics and executive characteristics.

An online questionnaire was sent via e-mail to top 200 non-financial firms (in terms of market capitalization) listed on Pakistan Stock Exchange.

With a response rate of 35 percent, it is concluded that the theory–practice gap is low as Pakistani listed firms are using discounted cash flow methods of capital budgeting and preferring net present value over internal rate of return. Similarly, weighted average cost of capital is estimated using target value weights, and capital asset pricing model (with extra risk factors) is used to determine the cost of equity capital. For risk assessment, sensitivity analysis and scenario analysis are the dominant approaches; however despite the theoretical superiority, the use of real options is very low. Overall, investment decision responses significantly differ across firm’s demographics and executive characteristics.

Pakistani business schools need to address the low usage of advanced methods such as modified internal rate of return and real options among Pakistani listed firms.

This is the first comprehensive study on the topic in Pakistan and have highlighted the areas of capital budgeting where Pakistani firms’ practices deviates from finance theory.

In this research, we analyze the impact of catastrophe events on risk-neutral densities which can be implied from European option markets. As catastrophe events we consider the destruction of the nuclear power plant at Fukushima and the downgrading of U.S. sovereign debt in 2011. In an event study, we analyze the impact on European blue chip index options traded at EUREX. We find that after a short adaption period, probability mass of especially risk-neutral density functions derived from long-term options is shifted toward the right side. Thus, very good states of the economy become more expensive indicating higher prices for deep out-of-the-money options. This signifies that there has been speculation on a recovery of the German stock market after the shocks.

This paper aims to demonstrate the practical application of real options analysis to the evaluation of multistage projects, using an example involving a commercial real estate development.

The approach demonstrated builds on static discounted cash flow (DCF) analysis and requires knowledge of only the binomial option pricing model.

Real options analysis can be implemented in a spreadsheet and only one parameter – the volatility of the price of the completed project – needs to be estimated in addition to those required for static DCF analysis. The approach described can be used to evaluate a project at any stage of development, which is especially useful when the suspension of partly completed projects is under consideration.

The paper shows how to carry out real options analysis of complex multistage development projects using straightforward valuation tools, making an important project evaluation technique more readily available to practitioners.