While I could lose on this particular investment, if I made this investment several times, I would come out ahead with a 146.5% payoff.
It should be noted that a key step in this process is to evaluate the quality of the estimates. The expected value of future cash flows is only as valuable at the information that goes into deriving them. It is a situation of garbage in, garbage out. In this case, the different weightings came from one analyst, who based his decisions on OPEC's informational output. OPEC may have been attempting to obfuscate its future policy direction in order to ward off oil speculators, or the analyst may have misinterpreted OPEC's communiques. In either case, it would have been advisable to gather information from more analysts before making the weightings.
There are also...
For example, if the up-front costs are known, that provides a starting point for a net present value analysis. In this case, we do not have any way of deriving a cost of capital nor do we have a clear sense of the future cash flows. So we cannot accurate use a capital budgeting model or subject it to a sensitivity analysis.
We therefore need to make the best use of the information available to make this decision. The most appropriate model then is the weighted average of expected future cash flows. That model gives us an expected return of 146.5%. All other factors being equal, that is a signal that I should invest in wind power. The amount of the investment will depend on my own level of wealth, as the expected return is the…
