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  • Financial Management: Self Study - Seminar Presentation

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    Bala Murugan
    15 vizualizări10 pagini
    This document discusses various risk analysis techniques used in capital budgeting. It begins by defining capital budgeting and risk. It then summarizes statistical techniques like expected net present value, variance, and coefficient of variation. Next, it outlines conventional techniques like payback, certainty equivalent, and risk-adjusted discount rate. The document proceeds to explain sensitivity analysis, scenario analysis, simulation analysis, and the decision tree approach. It provides examples and disadvantages of each technique. In closing, it lists a reference for further information.

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    This document discusses various risk analysis techniques used in capital budgeting. It begins by defining capital budgeting and risk. It then summarizes statistical techniques like expected net present value, variance, and coefficient of variation. Next, it outlines conventional techniques like payback, certainty equivalent, and risk-adjusted discount rate. The document proceeds to explain sensitivity analysis, scenario analysis, simulation analysis, and the decision tree approach. It provides examples and disadvantages of each technique. In closing, it lists a reference for further information.

    Drepturi de autor:

    © All Rights Reserved
    Descărcați ca PPTX, PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    15 vizualizări10 pagini

    Financial Management: Self Study - Seminar Presentation

    Încărcat de

    Bala Murugan
    This document discusses various risk analysis techniques used in capital budgeting. It begins by defining capital budgeting and risk. It then summarizes statistical techniques like expected net present value, variance, and coefficient of variation. Next, it outlines conventional techniques like payback, certainty equivalent, and risk-adjusted discount rate. The document proceeds to explain sensitivity analysis, scenario analysis, simulation analysis, and the decision tree approach. It provides examples and disadvantages of each technique. In closing, it lists a reference for further information.

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    © All Rights Reserved
    Descărcați ca PPTX, PDF, TXT sau citiți online pe Scribd
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    din 10

    FINANCIAL MANAGEMENT

    Self Study Seminar


    Presentation on 09.02.2015
    Risk Analysis in Capital Budgeting

    Index

    Capital Budgeting & Risk


    Statistical Techniques for risk analysis
    Conventional Techniques for risk analysis
    Sensitivity Analysis
    Scenario Analysis
    Simulation Analysis
    Decision tree approach

    Capital Budgeting & Risk


    Capital

    Budgeting:

    Process used to make


    decisions concerning investments in the long term
    assets of the firm.
    Risk: The potential that a chosen action or activity
    will lead to a loss

    Factors Influencing Risk:

    General Economic conditions


    Industry factors
    Company factors

    Statistical Techniques for Risk Analysis

    Probability Defined:
    - Likelihood of an event to occur
    - Objective -> Large no. of observations , Subjective -> state of belief
    Risk and Uncertainty:
    - Risk -> Probability distribution of cash flow known
    - Uncertainty -> Probability distribution of cash flow is not available
    Expected Net Present Value:
    - ENPV = Sum of present values of expected net cash flows
    Variance or Standard Deviation
    - Expected cash flow of each of the possible cash flows
    Coefficient of Variation
    - SD(Same) & EV( Different), SD(Different) & EV(same) , SD(Different)
    & EV(Different)

    Conventional Techniques for Risk Analysis

    Payback:
    - An attempt to allow for risk in capital budgeting
    decision rather than a method to measure profitability
    Certainty equivalent:
    - t= Certain net cash flow / Risky net cash flow
    Risk-adjusted discount rate:
    - K= Risk free rate + Risk premium
    - Difference between market rate of return and risk
    free rate multiplied by the beta of the project is risk
    premium

    Sensitivity Analysis

    Identification of variables which influence on the


    projects NPV
    Definition of the underlying relationship between
    the variables
    Analysis of the impact of the variables on the
    projects NPV

    Scenario Analysis

    Variables are independent of each other


    Variables may be inter related and may change in
    combination

    Disadvantages:
    Does not consider interaction between the
    variables
    Does not reflect on the probability of the change in
    the variables

    Simulation Analysis

    Interactions among variables


    Probabilities of the change in the variables

    Disadvantages:
    Quite complex
    Depends on previous values
    Identification of all possible relations and
    probability distribution is a difficult task

    Decision Tree Approach

    Define Investment
    Identify decision alternatives
    Draw a decision tree
    Analyse data

    References

    Financial Management 10th Edition by I.M Pandey

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