Risk and Investment Decisions

admin | November 5, 2009 | 0 Comments

Risk arises where the future in unclear and where a range of possible future outcomes exists. As the future is uncertain, there is a chance or risk that estimates made concerning the future will not occur. Risk is particularly important in the context of investment decisions.

This is because of the relatively long timescales involved, there is more time for things to go wrong between the decision being made and the end of project because of the size of the investment. If things go wrong, the impact can be both significant and lasting. Sometimes, a distinction is not paticularly useful for our purposes and in this chapter the two words are used interchangeably.

Sensitivity Analysis

A popular way of assessing the level of risk associated with a project is to carry out sensitivity analysis.

This method involves an examination of key input values affecting the project in paticular proposals.

Where the result on investment appraisal, using the best estimates, is positive, each input value can be examined to see by how much the estimated figure could be changed before the project becomes unprofitable for that reason alone.

For example, the NPV for an investment in a machine to produce a particular product is a positive value of £50,000. If we carry out sensitivity analysis on this investment proposal, we would consider each of the key input values in turn we would seek to find the most advers value which each of these inputs could have before the NPV figure becomes negative. The difference between the worst value calculated and the estimated value represents the margin of safety for that particular input. By carrying out a sensitivity analysis, managers may acquire a feel for the investment project which otherwise might not be possible.

Tags: risk analysis

Category: Financial Management

Comments (0)

Trackback URL | Comments RSS Feed

There are no comments yet. Why not be the first to speak your mind.

Instant decisions are available for Barclays current account customers who apply for loans online

Our personal loans could be in your account just three hours after you complete your application

Loans of £5,000 to £25,000 available online to Barclays current account customers

If you have your own property, why not see if our homeowner loan could offer you the funds you need? Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

Loans and Credit Cards

Welcome to Loans & Credit Cards.Co.Uk.

Credit Cards should only be used as rolling credit to help you till the month end, where the full balance should be paid once you receive your salary. Credit Cards can be used for your daily usage.

Travel - NOT HOLIDAY but to work and back
Food & Drinks plus weekend entertainment
Your Sundry and Daily Usage

Credit Cards should not be used for

Expensive Digital Equipment, like huge flat screen TVs, expensive Cameras, Hifi Equipment, Leather Couches, Beds, Furniture, Shares, Short Selling, Long Selling, Forex, Online Bingo Etc. Do not use Credit Cards for bargains unless the interest paid on the borrowing is still lower than what the item cost.
Purchases like these should ideally be made via your Savings from your Debit Card or With CASH ONLY

Personal Loans should ONLY be taken to help you invest in items that will not depreciate in value. For example

Education
Property

Expensive vehicles should only be purchased with loans if the vehicle is very necessary in terms of added value to your business or abosolutely required for your job. Otherwise buy an old banger for the school run and sign up for the AA Home Repair and Towing Service. If the family needs to take a long journey for a holiday, you can always rent a reliable car.

Personal Loans should NOT be used for investment in a business unless you are absolutely 100% sure the business will make a return, if it is a risky business, or a slight hint of risk, you should only use surpluss cash you have saved to invest.

There are resources here to help you make informed decisions and also know the pitfalls of taking on too much debt. There are separate articles about people who have took on too much debt and their consequences.
This website also provides basic accounting and financial management information to help you plan your finances.

LOANS & CREDIT CARDS are useful financial instruments, but they need to be used wisely, if you are not sure, ask your grandparents.......

UK Credit Cards

The standard interest rate on UK credit card ranges anything between 8 per cent and 25 per cent. Nevertheless there are few credit cards available at a much higher rate. The cheapest credit cards are usually offered by companies which decide the charges based on your credit standing. They judge your credit standing looking at your financial history.

UK credit cards are one of the most useful and practical financela instruments if you’re disciplined and can handle them sensibly. However, they are the most expensive form of legal borrowing.

UK Credit Card debt is extimated to be approximate £1.5 billion pounds.
Those paying the miminum a month are expected to take 30 years to pay their debt back.

UK Loans & Mortgages

There are currently over 200 significant separate financial organizations supplying mortgages and loans to house buyers in Britain. The major lenders include building societies, banks, specialized mortgage corporations, insurance companies, and pension funds. Over the years, the share of the new mortgage loans market held by building societies has declined. Between 1977 and 1987, it fell drastically from 96% to 66% while that of banks and other institutions rose from 3% to 36%. The banks and other institutions that made major inroads into the mortgage market during this period were helped by such factors as:

Relative managerial efficiency
Advanced technology
Organizational capabilities & expertise in marketing
Extensive branch networks
Capacities to tap cheaper international sources of funds for lending