The paper surveys the present state of knowledge about the appraisal and control of capital projects, and identifies the useful contribution which actuaries can make to the process.

Relevant theoretical considerations are discussed, including the choice of appropriate discount rates for use by companies when screening proposals. It is recommended that discount rates should be lower than those commonly used. Some practical working methods are summarised and examples are given of how risk analysis can be carried out, for both simple and complex appraisals. Attention is drawn to the special ‘social’ considerations which may apply in the case of Government projects. The opportunities now opening up for joint ventures between the UK Government and private sector partners are examined, and it is concluded that proper sharing of costs and risks can facilitate arrangements which are acceptable to both sides.

The paper concludes with a discussion of the procedures which companies can use to identify, appraise, control and monitor projects.

The risk premium on ordinary shares is investigated, by studying the total returns on ordinary shares, and on both long-term and short-term fixed-interest investments over the period 1919 to 1994, and by analysing the various components of that return. The total returns on ordinary shares exceeded those on fixed-interest investments by over 5% p.a. on a geometric mean basis and by over 7% p.a. on an arithmetic mean basis, but it is argued that these figures are misleading, because most of the difference can be accounted for by the fact that price inflation turned out to be about 4.5% p.a. over the period, whereas investors had been expecting zero inflation.

Quotations from contemporary authors are brought forward to demonstrate what contemporary attitudes were. Simulations are used along with the Wilkie stochastic asset model to show what the results would be if investors make various assumptions about the future, but the true model turns out to be different from what they expected. The differences between geometric means of the data and arithmetic means are shown to correspond to differences between using medians or means of the distribution of future returns, and it is suggested that, for discounting purposes, medians are the better measure.

Forecasts of mortality are included in official population projections. The methodology and performance of British mortality forecasts is reviewed and compared with those of the United States of America in the quarter century up to 1989. The results are found to have been surprisingly poor when compared, for example, with the more widely-criticised fertility component; similar conclusions hold for other developed countries. Although the methodology has become more sophisticated over the years by using detailed information on cause of death and cohort-based approaches, this has not led to obviously better forecasts, and the time period at which the forecasts are made is more important than the method used. The particular importance of mortality assumptions in determining projected numbers of elderly people discussed.