Analysis of Project Risk
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Transcript of Analysis of Project Risk
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JINCY C K
ROLL NO: 11
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A project simply refers to any investment
opportunity which is to be exploited for
profit. Project is an idea or plan which is
intended to be carried out. It may consist ofa new product, new service, new
organisation, new business or a new process.
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i. Aprojectinvolvesinvestmentofmoney
andmoneysworth.
ii. Itisariskyventure.
iii. Ithasafixedsetofobjectives.
iv. Everyprojecthasriskanduncertainty
associatedwithit.
v. Aprojectrequiresteamwork.
vi. Ithasalifecyclereflectedbygrowth,
maturityanddecay.
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Everyinvestmentischaracterised byreturn
andrisk. Ingeneral,itreferstothe
possibilityofincurringalossinafinancial
transaction.
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This possibility of variation of the actual return
from the expected return is termed risk.
Risk arises where there is a possibility of variation
between expectations and realizations withregard to an investment.
Total risk = systematic risk+ unsystematic risk
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Theimpactofeconomic,politicalandsocial
changesissystem-wideandthatportionof
totalvariabilityinsecurityreturnscausedby
suchsystem-widefactors isreferredtoassystematicrisk. Systematicriskisfurther
subdividedinto
Interestraterisk
Marketrisk Purchasingpowerrisk
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The returns from a security may sometimes
vary because of certain factors affecting only
the company issuing such security,
Eg: labour strike, management inefficiencyWhen variability of return occurs because of
such firm-specific factors, it is known as
unsystematic risk.
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Completing the project in time and within
the estimated cost itself is a major
achievement. A project that is delayed
will result in time over-run which willconsequently result in cost over-run.
There can be also technology failures,
which may result in non-completion of
project.
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Raw material, power, fuel, manpower etc., are
the resources used by a project. Shortage of
raw material may lead to reduction in
capacity utilization and higher cost ofproduction, which will make all profitability
estimates wrong.
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Price fluctuations of both inputs and
outputs affect the project. Unforeseen
happenings such as Governments
intentions in price fixation, ability ofcompetitors to offer their product to
customers at a comparatively cheaper
price etc., are likely to have an effect.
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Fluctuations in interest may bring in an
adverse effect.
If the interest rate increases in future, the
interest on working capital finance increaseswhich will result in lower profit margins than
estimated at the time of project appraisal.
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Technology risk may appear in two
forms. A project that is based on unproven
technology may have hidden defects which
may make the project a non-starter. Rapidgrowth in technology may make a project
obsolete in technology due to the evolution
of latest technology.
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The Government intervenes in many forms
such as levying and regulating taxes,
regulating monopolistic trade practices,
imposing import duties, promoting exports,prohibiting export of certain commodities,
issuing import licenses, controlling foreign
exchange transactions, price controls etc.
Political risk is a major risk since it cannot bepredicted easily.
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Exchange rate risk also called currency risk. It
is the risk arising from currency fluctuations.
Volatile exchange rates can reduce cost and
productivity advantages gained over years ofhard work. Firms exposed to international
economy face this risk. When a firm has
already committed to a foreign currency
denominated transaction, the firm is exposedto exchange rate risk.
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