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Hello may I knw how investment appraisal considers risk and uncertainty?
thanks
I do explain how ways in which we might deal with risk and uncertainty in my free lectures working through Chapter 10 of our free lecture notes – you cannot expect me to type out all of my lectures here 🙂
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
is that means investment appraisal considers risk and uncertainty when conducting the sensitivity analysis, expected value and risk-adjusted discount rate??
1. May I know still gt one more is what? because I listen from the lecture video whereby it mentions that there are 4 approaches.
2. May I know how investment appraisal considers risk and uncertainty VS why investment appraisal considers risk and uncertainty. The question is different right?
How- referring to the method of investment appraisal- such as sensitivity analysis, risk-adjusted discount rate, profitability analysis
Why- referring to why we want to conduct all these methods such as because we want to avoid failure, to determine the required rate of return, etcs..Am I correct?
Thanks sir
Basic NPV calculations do not deal with risk and uncertainty which is one of the problems – that cash flows and cost of capital are all estimates and therefore the NPV is subject to uncertainty.
The methods listed in the chapter are ways we might use to measure the degree of risk involved or to try and take some account of it. (The fourth method is capital asset pricing model, which is dealt with separately because it is such an important area.)
Ok sir understood.
How about the following queries]
May I know how investment appraisal considers risk and uncertainty VS why investment appraisal considers risk and uncertainty. The question is different right?How- referring to the method of investment appraisal- such as sensitivity analysis, risk-adjusted discount rate, probability analysis and capm
Why- referring to why we want to conduct all these methods such as because we want to avoid failure, to determine the required rate of return, etc.Am I correct?
Thanks
Investment appraisal on its own is affected by uncertainty but does not deal with uncertainty.
Accepting a project based on its NPV is always taking a risk – we are always basing it on estimates and if the estimates turn out to be wrong then we may discover that we made the wrong decision. The various methods available to look at the uncertainty help us decide how big a risk we are taking by accepting a project.
If, for example, a project has a positive NPV, but we find that just a 1% change in one of the cash flow estimates would result in the project giving a negative NPV, then we might decide not to risk doing the project.Watch again my free lectures on sensitivity analysis where I make this point and explain it.
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