ANALYSIS OF RISK AND UNCERTAINTY

Accept reject Decision The Risk-adjusted Discount Rate Approach can be used with both the NPV and the IRR. If the NPV method is used to evaluate capital expenditure decision. NPV would be calculated using the risk-adjusted rate. If the NPV is positive the proposal...
ANALYSIS OF RISK AND UNCERTAINTY

RISK EVALUATION APPROACHES Once the nature of risk is understood and its quantum estimated, it is to be incorporated within the decision making framework. This section examines the popular techniques to handle risk. They are: 1. Risk-adjusted Discount Rate Approach 2....
ANALYSIS OF RISK AND UNCERTAINTY

Coefficient of Variation: A Relative Measure of Risk Standard deviation can be misleading in comparing the uncertainty of alternative projects, if they differ in size. The coefficient of variation (V) is a correct technique in such cases. It is calculated as follows:...
ANALYSIS OF RISK AND UNCERTAINTY

Standard Deviation: Absolute Measure of Risk In statistical terms, standard deviation is defined as the square root of the mean of the squared deviation, where deviation is the difference between an outcome and the expected mean value of all outcomes. Further, to...
ANALYSIS OF RISK AND UNCERTAINTY

Precise Measures of Risk: Standard Deviation and Coefficient of Variation Assigning probabilities to cash flow estimates, as a measure of variability of future returns, represents a further improvement over sensitivity analysis, which, as already mentioned was...
ANALYSIS OF RISK AND UNCERTAINTY

SIMULATION Simulation is a statistical technique employed to have an insight into risk in a capital budgeting decisions, This technique applies predetermined probability distributions and random numbers to estimate risky outcomes. A simulation model is akin to...