The uncertainty about the future yearly Pax is quite high. With this as the backcloth for airport planning the stochastic nature of Pax forecasts has to be taken into account when investment decisions are to be made.
Traditionally, when estimating costs, project value, equity value or budgeting, one number is generated – a single point estimate.
Most companies have some sort of model describing the company’s operations. They are mostly used for budgeting, but in some cases also for forecasting cash flow and other important performance measures.
Calculating Wacc for a company for a number of years into the future is not a trivial task. Wacc is no longer a single value, but a time series with values varying from year to year.
In public works and large scale construction or engineering projects – where uncertainty mostly concerns cost, a simplified scenario analysis is often used …
When there is no uncertainty the maximum return criterion can be used to rank strategies. With uncertainty we have to look for the strategy that maximizes the firms expected utility.