Risk Management in Capital Budgeting

What is certain is uncertainty. All decisions and actions are taken to attain desired results. Decision and action precede the result. The future holds a certain uncertainty. Success, therefore, gives a sense of satisfaction. When the results of action are expected to arrive over a long period, the uncertainty is likely to be more, as the distant future is far less predictable. Corporate investment decisions are taken in anticipation of a stream of benefits over a long period. Mistakes may be expensive. All care must be taken to ensure that the future unfolds as per expectations. Management of risk is a complex subject. The total risk management in capital budgeting has been divided into three chapters. This chapter discusses the meaning of risk, the sources of risk and the decision maker’s attitude towards the risk. Risk management aims at appropriate designing of the proposed project so that inherent risk is reduced without a corresponding reduction in returns. The issues related to the designing of a project are discussed here. The next chapter discusses the risk analysis in the context of the project after it is designed. The concept of portfolio risk is finally dealt in chapter 15.