myz-vgb.ru A Business Encyclopedia

Risk Analysis Techniques

Definition: The Risk is prevalent in all the business decisions, but it is much more inherent in the capital budgeting decisions. These decisions are the long-term decisions, which involves huge cost and whose benefits are derived over a long period of time or during the lifetime of the project.

The risk varies according to the nature of investments. A research and development project can be much riskier than the expansion project while; the expansion project can be much riskier than the replacement project. Hence, the firm must evaluate the risk before employing its resources in any long-term investment project.

Risk Analysis Techniques in Capital Budgeting

Techniques of risk analysis

The firms apply several techniques to handle the risk associated with the capital budgeting decisions and are grouped into two broad categories:

  1. An approach to handling stand-alone risk of a project
  2. An approach to handling the risk associated with the firm and with the market (Contextual Risk)

These approaches can be further classified as:

Stand-alone Risk Analysis: Analyzing the risk of a project when it is viewed in isolation.

  1. Sensitivity Analysis
  2. Scenario Analysis
  3. Break-even Analysis
  4. Hiller Model
  5. Simulation Analysis
  6. Decision Tree Analysis

Contextual Risk Analysis: This covers the analysis of the project that contributes to the risk of a firm and the diversified investors.

  1. Corporate Risk Analysis
  2. Market Risk Analysis

Therefore, risk analysis is very much complex and cumbersome aspect of capital budgeting that requires a proper evaluation of risk and returns of the proposed investment project.

Leave a Reply

Your email address will not be published. Required fields are marked *

Shares

Related pages


define liquidationmonetarist approachbenefits of retrenchment strategymarginal costing methodhence meaning in hindiwhats a cardinalmeaning of internationalizationrowan plan formulajohari window modelkarl pearson coefficient of correlation pdftransactional theory definitioninternationalization strategiesthe meaning of rowanlinear programming dualitydifference between demat and trading accountwhat is moral suasionppf premature withdrawalfive categories of price elasticity of demanddefinition of elasticity of demand in economicsturnover ratio calculationseven seas of communicationstratified sampling with examplesdefinition cluster samplingcriticism of modigliani and miller theoryivan parlorearning capitalization modelgalloping inflation definitionlpp methodbehavioural segmentation examplemeaning of revitalisedefine administrative management theorybehavioral approach system definitiontotal utility in economicsdefine sfadefinition of purchasing power parityindifference curve definition examplediscounted method of capital budgetingentrepreneurial process modelbusiness phases business cyclegolden parachutes definitionwhat is the meaning of draweedemand segmentation definitiondefinition of divestiturerationing in economicsmodigliani financemeaning of hybridsdefine bureaucratic structureteleology examplerationing economics definitiondefinition of epfdefinition of indifference curvewhat is a bank lockboxmeaning of cardinal utilitywhat is demand forecasting in managerial economicsethnocentric exampleaverage debtors collection perioddefine retained earningcurrency speculatorswhat does stradle meaneconomics monopoly definitionethnocentrism definition and examplesmeaning of straddledimplied meaning in hindiethnocentric orientation definitionmsf ratewhat does speculator meanrelative purchasing power parity definitionteleologicallyvoluntarily unemployeddefine divestingstate the law of diminishing marginal utilitybpr processgordon growth modelwhat is meant by deficit financingexplanation of johari windowtotal utility refers toallport trait theorydefine rowan