Discuss the separate types of risk that affect capital investment decisions surrounding long- term financing decision...

Discuss the separate types of risk that affect capital investment decisions surrounding long- term financing decision that will be made by management.

Expert Solution

Capital investment decisions are irreversible in nature &. thus management has to be very careful when they take such decisions. The various types of risk are : Project risk which is the risk of the project not being completed in time , or not being profitable due to operational errors or in the initial execution. Market risk is the risk arising due to various macroeconomic factors such as inflation or interest rate. Since borrowings are made, and if interest rates rises then it becomes costly for the firms. International Risk due to forex transactions or forward contracts, currency exchange fluctuations. Political risk due to threat of war , instability , etc. There may be other risk such as credit risk which leads to deafult of payment . there can be operational risk which can lead to a halt or disruptions in carrying out the given project. there can be horizon risk due to unforeseen circumstances .

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