Capital budgeting decisions are risky.: Research the risks associated with capital budgeting and identify the three...

Capital budgeting decisions are risky.:

Research the risks associated with capital budgeting and identify the three that you believe are the most significant risks.
Describe these risks and support your assertion with specific reasons.

Expert Solution

CAPITAL BUDGETING

DEFINITION: Capital budgeting is the process a business undertakes to evaluate potential major projects or investments.

Construction of a new plant or a big investment in an outside venture are examples of projects that would require capital budgeting before they are approved or rejected.

RISKS ASSOCIATED WITH CAPITAL BUDGETING:

projects differ in risks and it should be reflected in capital budgeting decisions .

However,it is difficult to measure risk,especially new projects without a history.

Three separate and distinct type of risks involved are

1.STAND ALONE RISK :

the risk an asset would have if it was a firm only asset and if investors owned only one stock.it is measured by the variability of asset expected return.

2. CORPORATE RISK :

risk considering the firms diversification but not stake holder diversification .It is measured by the projects effect on uncertainty about the firm future expected returns.

3. market risk :

considers both firm and stack holder diversification .it is measured by the project beta coefficient.

ekkarill92 answered 1 year ago

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