ASSESSMENT OF PROJECT RISK
The major features relating to the methodology followed by the Indian corporate to assess the project risk and the relative significance assigned to different risk assessment techniques are summarized below.
• The respondent firms use, as can be expected, more than one technique out of the available techniques, namely, sensitivity analysis, scenario analysis, risk adjusted discounted rate. decision-tree analysis and Monte Carlo simulation.
• The sensitivity analysis is used overwhelmingly (91 per cent). It is used more significantly by public sector units and private sector firms having chartered accounts (CAs) as chief financial officers (CFOs).
• The scenario analysis is also used widely (62 per cent) more frequently by large firms than small firms.
• The risk adjusted discount rate is used by around one-third of the corporate.
• The decision tree analysis as well as Monte Carlo simulation to analyse project risk is not popular among corporate to any significant extent.
• Sensitivity analysis is the most popular approach for quantifying risk. The sample corporate also use two other methods, namely, shorter pay back period and higher cut-off rate.
• Diversification of corporate investment is also used by the sample corporate (53 per cent) for, risk reduction.