Application of probability theory to marne project appraisal

The importance of specifying and quantifying the project risks in the investment decision process cannot be overemphasized. Even more so in the context of marine project appraisal, since the shiping markets are characterized by extreme volatility and high cyclicality. The use of probability theory in investment decisions is reviewed and applications are derived for marine projects. The paper focuses on the use of Monte Carlo simulation to determine the mean and variance of the input variables. Within the Monte Carlo framework three alternative methods are used for the construction of probability distributions; the scaled halves of a normal distribution, two unscaled parts of a normal distribution and finally use of altenative distributions, such as beta, gamma and chi-square. An alternative methodology is also drawn from the literature, namely the Pearson-Turkey three point approximation, to contrast with the Monte Carlo method.