1 Discounted Payback period
Estimates of cash flows several years ahead are quite likely to be inaccurate and unreliable may be difficult to control capital projects over a long period of time. Risk may be limited by selecting projects with short payback periods, in addition to positive NPVs.
In order to overcome the weakness of payback, some companies calculate the payback on the basis of discounted cash flow rather than the raw cash flow.

2 Risk-Adjusted discount rate
If an individual investment or project may be perceived to be more risky than existing investments, the increased risk could be used as a reason to adjust the discount rate. The application of increased discount rate is often successful in eliminating marginal projects.
See details of this topic in next session.
A high discount rate can be used to lessen the effect of later cash flow on the decision. Alternatively, with the launch of a new product, a higher initial risk premium may be used with a decrease in the discount rate as the product becomes established.

3 Monte Carlo simulation model
-Simulation will overcome problems of having a very large number of possible outcomes, as well as the correlation of cash flows.
-Sensitivity analysis considered the effect of changing one variable at a time.
-Monte Carlo simulation improves on this by looking at the impact of many variables changing at the same time.
Using mathematical modelling it produces a distribution of the possible outcomes from the project. The probability of different outcomes can then be calculated.
. An ex[ected NPV for the project
.A statostoca; dostrobitopm pattern for the possible variation in the NPV above or below this average
The decision whether to go ahead with the project would then be made on the basis of expected return and risk.

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