USING AHP AND FINANCIAL CRITERIA FOR EVALUATING ALTERNATIVES TO REDUCE RISK OF INVESTMENT

Milena Popovic, Sanja Milosevic and Marija Kuzmanovic

pp. 377-386

Keywords: Analytical hierarchy process, financial criteria, WACC, uncertainty, risk, in-vestment.

Paper type: Research Paper

Published online: 29 October 2012

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Abstract

In todays highly turbulent business environment, characterized by uncertainty, it is important to find out adequate approach to solve high-stake problems. This paper presents different criteria for business decision making, and their application in practice. Analytical Hierarchy Process (AHP) is a method of multi-criteria evaluation which organizes and simplifies decision-making. Making the decision should include analysis of financial benefits that certain investment brings. The paper also presents financial criteria in evaluating the efficiency of investments, such as net present value, internal rate of return and payback period. Particular emphasis is on the model for calculating the cost of corporate capital (CAPM), which serves as the basis for calculating the optimal rate for discounting, as well as on the WACC coefficient for calculating the discount rate. A numerical example is given to illustrate its application to solving the real problems.