Kjetil Emhjellen, Magne Emhjellen
When evaluating new investment projects, oil companies traditionally use the discounted cashflow method. This method requires expected cashflows in the numerator and a risk adjusted required rate of return in the denominator in order to calculate net present value. The capital expenditure (CAPEX) of a project is one of the major cashflows used to calculate net present value. Usually the CAPEX is given by a single cost figure, with some indication of its probability distribution. In the oil industry and many other industries, it is a common practice to report a CAPEX that is the estimated 50/50 (median) CAPEX instead of the estimated expected (expected value) CAPEX. In this article we demonstrate how the practice of using a 50/50 (median) CAPEX, when the cost distributions are asymmetric, causes project valuation errors and therefore may lead to wrong investment decisions with acceptance of projects that have negative net present values.
@article{2398804c-75e7-4734-b6e4-06e69cdd9ccd,
title={Cost Estimates and Investment Decisions},
author={Kjetil Emhjellen and Magne Emhjellen},
year={2026},
language={en}
}TY - JOUR TI - Cost Estimates and Investment Decisions AU - Kjetil Emhjellen AU - Magne Emhjellen PY - 2026 LA - en ER -
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