Question

Risk Factors and Capital Projects Week 4 Write a 175- to 265-word response to the following:

What are some risk factors when making decisions regarding capital projects? Provide details.

Answer 1

Risk Factors associated with Capital projects: There are numerous risk factors associated with capital projects which includes, operational risks, financial risk and market risks. We will see other types of risks which comes while undertaking capital projects.

Examples of such risks are:

(i). Corporate Risk or Company risk

(ii). International risk

(iii). Industry specific risk

(iv). Market risk

(v). Stand-alone risk

(vi). Project Risk.

We will see all these risks one by one with example to understand these risks:

(i). Corporate Risk or Company specific risk: It is the risk that the firms uncertainty could lead to loss in the amount invested by investor and an investor may not be able to get the required rate of return through the investment is known as corporate risk, corporate risks are diversifiable we can diversify risk through avoiding the investment in risk prone companies.

(ii). International risk or currency risk: It includes the risk which can be faced by an investor if he is involved in the business of export or import, this is because the exchange rate of different currencies are different and are volatile over time.

(iii). Industry Specific risk: Industry specific risk is the risk associated with any particular business, for example investment industries are heavily affected by changes in interest rates. These types of risks is known as industry specific risks.

(iv). Market risk: Market risk is type of systematic risk which can't be eliminated by diversification. It is a type of risk experienced by investors that the investment made in funds can lead to losses. There are several underlying factors which impacts the risks associated with this.

(v). Standalone risk: This is a very crucial to understand this type of risk, stand-alone risk is a risk which is created due to a company's specific asset or due to failure of strategy made to deal with the operations of the business.

As we can categorise this risk as a company specific risk, it can be diversified.

(vi). Project risk: Project risk is the risk that the undertaken project may generate losses to the company there can be several reasons to failure it can be because of the improper procurement of funds which can lead to delay in the completion of the projects and may attract penalty which can in turn make losses to the firm.