Measures of liquidity risk supplementing fuzzy discounted cash flow analysis


Engineering Economist, vol.43, no.4, pp.331-344, 1998 (Scopus) identifier

  • Publication Type: Article / Article
  • Volume: 43 Issue: 4
  • Publication Date: 1998
  • Doi Number: 10.1080/00137919808903203
  • Journal Name: Engineering Economist
  • Journal Indexes: Scopus
  • Page Numbers: pp.331-344
  • Galatasaray University Affiliated: Yes


Fuzzy discounted cash flow (DCF) techniques have been used to cope with the problems encountered by the deterministic or probabilistic evaluation of the investment alternatives. However, especially when a superior alternative cannot be spottrd as a result of the DCF analysis, these techniques require a supplement such as the payback method or the duration analysis to assess liquidity risk. In this paper. I present fuzzy analogues of the payback method (conventional and discounted), which is a frequently used measure of liquidity risk in capital budgeting. Next. for investment projects. I propose a fuzzy economic evaluation criterion based on the duration measure, which incorporates liquidify risk in capital investment while overcoming the obvious shortcomings of the payback method. Then, via a numerical example. I illustrate how to use the fuzzy payback method and fuzzy duration analysis as secondary decision criteria to rank investment alternatives, for which preference cannot be expressed in terms of fuzzy present worths. © 2013 Elsevier Science BV.