6.1 Capital Budgeting Risks

 

The term risk in this case is the uncetainy degree associated wih an asset’s returne. There exist many kinds of risks in capital budgeting, including project specific, market, international, corporate, industry specific and stand-alone risks (Anonimus, n.d.). In more detail explanation, Project specific risk is the relatively specified risk for a certain project. The risk can happen as a result of discount rate or cash flow estimation error done by deficiency in management leading to unfavorable situation that the actually realeased cash flow become less than the projected one (Sarav and Sarav, 2017). Market specific risk results from macroeconomic factors rates of interest and inflation. This kind of risk significanlty happen in the time of unstable or weak economical condition. Once the economic situation is down, product demand decreases, potentially creating unprofitable project (Rodeck, 2016). International risk exposure happen as a result of involved or shared capital budget projects between companies across countries, which entail exchange rate and political project risks. Political or civil unrest potenially caused entirely lost investment if the ongoing project is being established in a country of unstable political structures (Rodeck, 2016). Corporate risk can be defined as risk of organization suferring from declines in earning and revenues as a result of unfavorable events affecting the organization or corporation (Anonimous, 2020). Industri specific risk means the risk affecting the sector of industry where the companies the runs the business. The last one is he stand alone risk which has association with a single company or unit of operation, asset or division of a company in its opposition to a well diversified and larger portofolio (Chen, 2021).             

Based on the above definition, the most significant risks are project, market and international risks. The specific reasons can be based on the above definition that the market and project risk have a close relation each other. Existing interest based investment will give heavy usury that really makes the project unprofitable. The project cost will increase so much if the established method only takes interest not based on profit and loss sharing, the poor will get poorer and the rich will get richer. Therefore, the investment system should be chosen if not only profit but also loss will be shared between the investors and business contributors.  In relation to the product if the market demand is down, the project will be considerably unprofitable due to the fact that their production rates will go down proportionally with decreasing demands. If the projects of making the massive product are still done as usual. Many products will remain in the inventories for a long period of time. This is unfavorable since the products might reduce the original reliability and quality. The third risk that mostly contribute to the global economic problem is the international risks. This risk actullay happen on the shared exporting and importing projects on very high demand such as the current covid 19 vaccines. The rejection of some citizens to take imported vaccines from specific countries due to the existing hatred or kinds of sensitive issues making them massively reject the national and vaccination program with the result that the country’s investment for the national and world herd immuniy will be difficult to achieve.   

 

References

Anonimous. (n.d.). Boundless finance. Lumen. Retrieved October 11, 2021, from https://courses.lumenlearning.com/boundless-finance/chapter/the-relationship-between-risk-and-capital-budgeting/.   

Sarav, & Sarav Author. (2017, June 4). Risks in Capital Budgeting. Mytypings.com. Retrieved October 11, 2021, from http://mytypings.com/risks-in-capital-budgeting/.  

Rodeck, D. (2016, October 26). What factors increase the riskiness of a capital budgeting project? Small Business - Chron.com. Retrieved October 11, 2021, from https://smallbusiness.chron.com/factors-increase-riskiness-capital-budgeting-project-15829.html. 

  Anonimous. (2020, September 8). Guide to corporate risk in capital budgeting - WELP magazine. Welp Magazine - Business Strategy, Executive Software, Growth Hacking and more... Retrieved October 11, 2021, from https://welpmagazine.com/guide-to-corporate-risk-in-capital-budgeting/.  

AbuJubara, A. A. (2020, March 16). Risks Associated with Capital Budgeting. Amjed online . Retrieved October 11, 2021, from https://amjedonline.com/2020/03/16/risk/.  

Chen, J. (2021, May 19). What is standalone risk? Investopedia. Retrieved October 11, 2021, from https://www.investopedia.com/terms/s/standalone_risk.asp.