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UNCERTAINTY AND RISK IN

CAPITAL BUDGETING Analyzing Project Ri!

"ea#ring Project Ri!

Ri!$A%j#te% In&et'ent Analye

Ri! A%j#t'ent Practice

Co''on Error in Project Ri! Ae'ent

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Analyzing Project Ri!

Project$S(eci)ic Ri! * Ri! aociate% +it,Project- i'(act o) ca,$)lo+ .Re&en#e-

/(erating "argin- 0or!ing Ca(1- /t,er Ri!.Location- 2#ality o) Peronnel134 Project Ri! Di&eri)ication* Selection o) large n#'5er

o) (roject eli'inate t,e error o) eti'ation3

Co'(etiti&e Ri!* T,e re&en#e are a))ecte%(oiti&ely or negati&ely 5y t,e action o)co'(etitor- .(rice re%#ction- ne+ (ro%#ctintro%#ction1

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Analyzing Project Ri!

In%#try $S(eci)ic Ri!* 6aria5ility in Ca, )lo+ %#e to tec,nologyri! - co''o%ity ri! an% legal ri!4 Tec,nology Ri!

4 Legal Ri!

4 Co''o%ity Ri!

International Ri!* /&erea Project- E7c,ange rate 'o&e'ent-(olitical ri!

4 Di&eri)ication (oi5le 5y ta!ing (roject in %i))erent co#ntrie +it,#ncorrelate% c#rrencie 'o&e'ent3

4 Deri&ati&e can ,el(

"ar!et Ri!* "acro Econo'ic )actor- Interet rate 'o&e'ent-in)lation-4 Non Di&eri)ia5le Ri!

4 Deri&ati&e Pro%#ct can ,el(

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S#''ary

Risk Example Firm mitigatesby

Investormitigates by

Private firm

Project Ri! Eti'ation"ita!e- Erroro) (ro%#ct -

location

Ta!e a largen#'5er o)(roject

8ol%%i&eri)ia5le(ort)olio

S,o#l% not'atter i) )ir'ta!e large

n#'5er o)(roject

Co'(etiti&e Une7(ecte%'o&e o)co'(etitor

Ac9#iringco'(etitor

8ol%co'(etitor

0ill 'atter

In%#try C,ange t,at

e))ect allin%#try

Di&eri)y in

ot,er ector

8ol% %i&eri)ie%

(ort)olio

0ill 'atter

International C#rrency ri! In&et in'#lti(leco#ntrie

8ol% acroco#ntrie

0ill 'atter

"ar!et Ri! Interet rate- Non%i&eri)ia5le

Non%i&eri)ia5le

0ill "atter

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8o+ %o +e %eci%e t,e )ir'

clai)ication 5ae% on Ri!: G#e t,e category o) 'arginal in&etor

% InstitutionsHolding

% Held byInsiders

MarginalInvestor

Category

8ig, 8ig, Intit#tionalIn&etor

Di&eri)ie%

Lo+ 8ig, Ini%er./+ner1

Un%i&eri)ie%

Lo+ 8ig, 0ealt,yIn&etor

Di&eri)ie%

Lo+ Lo+ S'all In&etor Retricte%Di&eri)ication

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"ea#ring Project Ri!

"ea#ring "ar!et Ri!

4I) (roject ri! i contant acro t,e )ir'

4I) (roject ri! &arie acro t,e )ir'

Botto' #( Beta .Calc#late #ing t,e co'(ara5le

)ir' .coni%er o(erating le&erage1

Acco#nting Beta

;#n%a'ental Beta

.B?3@>Co?3DE?3>g$3TA1

0,ere Co

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Ri!$A%j#te% In&et'ent Analye

A%j#ting Dico#nt Rate4 A%j#ting Cot o) E9#ity

Project cot o) e9#ity

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Ri! A%j#t'ent Practice

Ki' Cric! an% Ki' .F=1 S#r&ey o) H@)ir'3

4Ri! A%j#t'ent Tec,ni9#e No A%j#t'ent i 'a%e .F1

A%j#t'ent i 'a%e #5jecti&ely .1

Certainty E9#i&alent .J1

RADR .@1 S,ortening (ay5ac! .J1

/t,er .>1

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In&et'ent Analyi .In)lation1

F?No'inal R

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Co''on Error in Project Ri!

Ae'ent ;ail#re to acco#nt )or ri!

Co#nting t,e a'e ri! 'ore t,an once

A((lying )ir' ri! (ro)ile to (roject

Coni%ering %i&eri)ia5le ri! in (roject

analyi3