Question

Please answer this by not taking from the web but from your owns perspective, please elaborate...

Please answer this by not taking from the web but from your owns perspective, please elaborate the risk analysis in the capital budgeting and how do we implement it. at least 250 words, thanks

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Risk analysis is the way by which one can understand he different risks involved within a particular operational or financial decisions as well as assess and evaluate the impact of these risks on to the overall business performance.

Capital Budgeting is the system of identifying, evaluating and determining long-term investment decisions for an organisation's growth and expansion activities. Since funds available for investments are scarce to the available investment opportunities and due to the long term nature of capital budgeting decisions, risk analysis becomes an integral part of it. Risk analysis enables the decision maker to gather information of the various risks involved with an investment decision. These risks could be associated directly with the investment or project such as currency risk, geographical risk, political risk, other project or industry specific risks or the risks could be more broad based and affect the entire organisation such as corporate risks, financial risk, etc.

While preparing a proposal for a new potential investment, one can take qualitative and quantitative approaches to evaluate the risks associated with the project. Qualitative analysis would include conducting an in depth study of the natural and political conditions in the region in which the project is to be set up as well as region where it has maximum exposure (could be in form of raw materials, financial borrowings, output sales, etc.). For quantitative risk analysis, multiple methods have been established overtime and one can use a single method which is most suited towards analysis of a project or a combination of different methods can be taken while weighing the results for better decision making. Quantitative risk analysis methods are as follows:

1. Cost-Benefit analysis - analysis of the potential sales from a project versus the costs involved in the project

2. Scenario analysis - one can incorporate different input (cash, raw materials) or output (production efficiency, sales output) scenarios and analyse the profitability and risks associated with each scenario. Scenario analysis is usually done for a small number of scenarios with variability in different parameters.

3. Sensitivity analysis - an improvement to scenario analysis is sensitivity analysis where one can analyse the sensitivity of each parameter to another involved in the decision. This is a further deep dive into the all parameters of the project.

4. Monte Carlo simulation - Simulation analysis is a more expensive but more effective for understanding and estimating the risks associated with a capital budgeting investment decision.

In conclusion, risk analysis can be very effective in capital budgeting investment decisions when appropriately implemented.

Add a comment
Know the answer?
Add Answer to:
Please answer this by not taking from the web but from your owns perspective, please elaborate...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT