CHAPTER 9

Risk Analysis in Capital Budgeting

The Present Chapter

It discusses the capital budgeting techniques used in evaluating a project under risk (uncertainty).

Introduction

Every project has some amount of risk. Therefore, incorporation of risk factor in the discounting rate becomes crucial for project decision. Risk exists because of the inability of the decision maker to make perfect forecasts.

There are three broad categories of the events influencing the investment forecasts:

a.   General economic conditions

b.   Industry factors

c.   Company factors

What is Risk?

The risk associated with an investment may be defined as, “the variability that is likely to occur in future returns from the investment.” It is the difference that exists ...

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