Risk management basic concept
- 2. Capital expenditure It involves a current / future outlay of funds in the expectation of a stream of benefits extending far into future. Features: 1. They involve long term consequences 2. They involve substantial outlays. 3. Difficult to reverse as they are expensive.
- 3. Why is it required? Capital structure decision Short term operations – working capital decision Allocation of capital. One of the primary goals of capital budgeting investments is to increase the value of the firm to the shareholders. Financial decisions are left with the top level management. Finance manager is entitled with this responsibility.
- 4. The planning process used to determine whether an organization's long term investments. Examples: new machinery, replacement of machinery, new plants, new products, and research development projects Risk analysis in capital budgeting fall into two broad categories: 1. Approaches that consider the stand alone risk of a project 2. Approaches the risk of a project in the context of the firm /market.
- 5. Implementation Performance review Decision making Preparation of capital budget and appropriation Identification of potential Investment opportunities Assembling of proposed investments
- 6. Making an investment proposal into a concrete project is a complex, time- consuming, and risk-fraught task. Adequate Formulation of projects Use of the principle of Responsibility Accounting Use of Network Techniques. (PERT and CPM)
- 7. Statistical techniques of Risk analysis Probability Standard Deviation/Variance Co-efficient of Variation. Conventional techniques of Risk analysis Payback period Risk adjusted discount rate Certainity equivalent