Employing Capital Budgeting and Risk

Risk is an important aspect of business and investment. The impact of risk needs to be measured on all capital projects and investments. In fact, most accomplished investors consider the measure and management of risk to be more important than the consideration of investment return. If risk is considered effectively, the returns will tend to take care of themselves.

To gain a full understanding of the impact of risk on the success or failure of capital projects, you can see the different views of risk and that all should be considered. For this discussion, you are a financial analyst of a mid-sized corporation, and the CFO has come to you with a pet investment project. The CEO has done a preliminary analysis using NPV, IRR, payback period, and PI, and it appears to be a worthy project that should add significant value to the firm. However, the CFO has a feeling that the CEO has failed to incorporate risk into the analysis. He has asked you do some risk analysis of the project to see if that will alter the final decision to invest or not.

Prepare a post that responds to these questions:

• What type of risk analysis would you incorporate into your analysis?
• How reliable are these analyses?