The third approach, modern capital budgeting, recognises that today’s (present) value of an investment asset is the cash flow it can generate in the future, not the returns it has provided in the past. Accordingly, investment appraisal must adopt an ‘ex ante’ - forward- looking analysis - as distinct from the backward-looking focus of the traditional financial approaches typified by the ROI calculation. Modern capital budgeting, also known as ‘modern financial theory,’ focuses on deterministic discounted cash flow, and the probabilistic approaches of project risk analysis (Pyhrr, Cooper, Wofford, Kapplin, and Lapides (1989). Traditionally, under this approach, the required return on an investment is a function of.
