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Your email address will not be published.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 *


Related pages

authorised capital meaningwhat is a straddle positiondefinition sole proprietorshipdeontological ethics meaninghow to find profitability indexordinal scale examplescharacteristics of a perfectly competitive industryvictor vroom theory of expectancyinventory outsourcingan oligopolistic marketadministrative management theory by henri fayolexample of participative leadershipmm approach of dividend policywhat is the definition of an oligopolywhistle blowing meaningjohary windowheadcount dashboardwide span of control disadvantagesexamples of capital employedwhat is monopolistic marketmodigliani and miller approachegoism ethical theorybarrier synonymdef of resonatecorrelation scatter graphvictor vroom motivation theorydettol definitioncareer development in hrmcorrelated defaccounting profitability ratioswhats a moratoriumwhat does teleological meandivests definitionmarketing influences on consumer decision makingstructural unemployment definition economicsclassification of elasticity of demandpluralist approach definitionretail promotion mixcyclical unemployment definitionbusiness jargons listconventional marketing channel definitionethical theoriesrepositioning marketing definitionschumpeter definition of entrepreneurprice elasticity of demand of luxury goodsnpv defineddivested definitionunitarist meaningturnover ratio calculationdefinition of hostile takeoverdefinition of appraisal systemsocial factors affecting consumer buying behaviourfeatures of perfectly competitive marketemployee provident fundwhat is sole proprietorship meanwhich of the following is a unique feature of oligopolywhat is the meaning of operant conditioningindifference curve and its characteristicsdefinition of franchiseeintrapreneurs definitionsimple definition of debenturesbudget line microeconomicscharacteristics of grapevine communicationdebt financing advantages and disadvantagesdescription of non verbal communicationdefine perfect competition in economicspost office cash withdrawal limitgrowth strategies ansoff matrixchannel conflict in marketinghow to calculate karl pearson coefficient of correlationstimulus meaning in urdupath goal theory leadership stylesmonetization of fiscal deficitdefine quantitative techniquesarbitrage definition economicssbi bank kioskdef of hrmwhat does the term autocracy meantypes of monopolistic competitionansoff growth strategybrand rejuvenation definitioncredit turnover ratio formulappf economics definition