ANALYSIS OF CORRELATED RISKY CASH FLOW

In the analysis of a single cash-flow profile under risk, between-peri od dependency among cash flows raises considerable difficulty in the e valuation of the profile's net present value. It is assumed in this pa per that the cash-flow profile exhibits a first-order autoregressive t ime-series structure, with the trend of the AR(1) process being a dete rministic AR(1) in itself. The relevant parameters, however, are unkno wn. It is also assumed that the estimates of the cash-flow in every pe riod are available. Applying an ''error-in-variable'' analysis on the estimates, the relevant parameters of the time-series model are derive d. This then allows the mean and variance of the profile's NPV to be s ubsequently evaluated.