Risks Involved in Capital BudgetingThe process of capital budgeting must take into account the different risks faced by corporations and their managers. Show
Learning Objectives Identify the different risks that must be accounted for in the capital budgeting process Key TakeawaysKey Points
Key Terms
Capital BudgetingCapital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments, such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. When taking on this planning process, managers must take into account the potential risks of the investment not panning out the way they plan for it to, for any number of reasons. In order to discuss this further, we should look into defining the concept or risk. RiskRisk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called "risks. " Possible Business Risks: This chart represents a list of the possible risks involved in running an organic business. Risks such as these affect sales, which in turn affect the amount of operating leverage a company should utilize. There are numerous kinds of risks to be taken into account when considering capital budgeting including:
Each of these risks addresses an area in which some sort of volatility could forcibly alter the plan of firm managers. For example, market risk involves the risk of losses in position due to movement in market positions. Risk AversionRisk aversion describes how people react to conditions of uncertainty and has implications for investment decisions. Learning Objectives Evaluate a person's risk aversion Key TakeawaysKey Points
Key Terms
In the realm of finance and economics, Risk Aversion is a concept that addresses how people will react to a situation with uncertain outcomes. High dividend gambles: Risk aversion can be applied to many different situations including investments, lotteries, and any other situations with uncertain outcomes. It attempts to measure the tolerance for risk and uncertainty. Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff. For example, a risk-averse investor might choose to put his or her money into a bank account with a low but guaranteed interest rate instead of investing in a stock that may have high expected returns, but also involves a chance of losing
value. Risk aversion can be applied to many different situations, including investments, lotteries, and other situations with uncertain outcomes. Because organizations are composed of individuals, risk aversion at the individual level plays a role in organizational decision making. Approaches to Assessing RiskSome of the quantitative definitions of risk are grounded in statistical theory and lead naturally to statistical estimates, but some are more subjective. Learning Objectives Define different types of risk Key TakeawaysKey Points
Key Terms
There are numerous important and applicable approaches to assessing risk in capital budgeting. Inspecting Equipment: Risk can be assessed in a number of ways, and is a critical step in capital budgeting and planning, as well as project management. The field of behavioral finance focuses on human risk-aversion, asymmetric regret, and other ways that human
financial behavior varies from what analysts call "rational". Risk, in that case, is the degree of uncertainty associated with a return on an asset. In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the enterprise in question. Its impact can be on the very existence, the resources (human and capital), the products and services, or the customers of the enterprise, as well as external impacts on society, markets, or the
environment. In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management, market risk, and operational risk. Licenses and AttributionsCC licensed content, Shared previously
CC licensed content, Specific attribution
What is the potential that a chosen action may lead to an undesirable outcome?Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to an undesirable outcome or may not enable the achievement of a desired outcome.
Is the potential that a chosen action?What is risk? It is the potential that a chosen action may lead to an undesirable outcome.
What is the term for the principal that an object in motion remains in motion until it is met by an outside force?What is the term for the principal that an object in motion remains in motion until it is met by an outside force? Inertia.
How we interpret and understand information gathered by any of the five senses is defined as?Perception. How we interpret and understand info gathered by the five senses.
|