comments hi sheridan hope good vacation vasant looked memo found interesting shall first briefly summarize understanding methodology propose comments follow finally shall sketch simple gas field project use test case refining model appears proposing state space approach probabilities different states various future dates specified next step assume discount rate compute present value following branches origin one terminal points traversing tree manner many iterations permit us compute average present value project also using simulation assign value project node thus node cash flow associated occur node reached value expectation value realized going forward values turn negative zero coupon risk free bonds purchased neutralize negative realization next find comparable apply expected rate return back project based variance returns iterate convergence finally subtract initial investment computed risk capital pv gross cash flows including debt determine project merits consideration comments clarifications 1 money set aside avoid negative values clear mean values cash flow pv node anyhow shall setting aside money specific node nodes cross section time risk free asset pays states nature done every time negative realization thus typical project value risk capital may extremely high following tail based norm anymore 2 memo appears suggest debt capacity contingent values positive issuing risk free debt also project single negative value cross section time positive debt capacity 3 seems optimization argument discount rate obtained step comparison investment equating variances clear changing discount rate effect project variance lead global convergence also project finite life market based assets infinite lives light fact define relevant variance spot variance returns comparison investment 4 finally criterion subtract average pv investment also risk capital setting risk capital zero model closely resembles intuitive present value criterion endogenously determines discount rate gas field case facilitate thinking providing gas field example invest x million dollars buy develop gas field profile expected production variance production per year available engineers beginning production autocorrelated profile shift based actual gas reserves less estimated reserves assume life field 10 years salvage value fixed variable operating costs might useful think applying framework problem let know questions rakesh