Difference between risk and uncertainty
Risk
·Several possible outcomes
·On basis of past relevant experience, assign probabilities to outcomes
·Increases as the variability of returns increases
·Quantifiable- so it can be built into a project’s NPV
Uncertainty
·Several possible outcomes
·Little past experience, thus difficult to assign probabilities to outcomes
·Increases as project life increases
·Unquantifiable- the potential impact of an uncertain variable on a project’s NPV can only be described.
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Next：Probability and expected values
·Several possible outcomes
·On basis of past relevant experience, assign probabilities to outcomes
·Increases as the variability of returns increases
·Quantifiable- so it can be built into a project’s NPV
Uncertainty
·Several possible outcomes
·Little past experience, thus difficult to assign probabilities to outcomes
·Increases as project life increases
·Unquantifiable- the potential impact of an uncertain variable on a project’s NPV can only be described.
Back：Advanced application of NPV method
Next：Probability and expected values
