OTHER INCOME PATTERNS AND STOCHASTIC CONSIDERATIONS IN ECONOMIC DECISION MAKING

The purpose of this paper is two fold: first to provide a method for evaluating projects which have an income pattern describable by a polynomial function of time, and to provide a means for evaluating projects which exhibit a yearly growth or decline in earnings while maintaining the ability to account for the time pattern of earnings, and second to bring forth an assessment technique which will reflect the possibility of attaining various levels of income for each of the periods of interest. Methods utilized in developing the various models are based on the concept of dynamic return.

The future and present worths of a project are calculated for the case in which the earnings follow a pattern of the form given by either Ct^m or C(l — t)^m. Two types of growth patterns, geometric, in which earnings increase or decline by a fixed percentage each year, and arithmetic, in which earnings increase or decrease by a fixed amount each year, are analyzed. Finally, an income model based on the binomial distribution is developed for evaluating projects which could have two income levels, each having an associated probability. Upper and lower confidence limits for the present and future worths of the project are calculated. Extensions are noted which will permit the inclusion of any of a number of levels of profit for each year of the project.