1.Chose one of the three types of risks in capital budgeting and explain their impact.

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Expert Solution

Capital Budgeting is subjected to many risks like Financial risks, market risks, operational risks.

Lets see the market risk.

Market Risk: This risk is external in nature. Markets are ever-changing. market risk is present when the changes in the market can adversely impact the business of the company. It can include change in technology, changes in pricing of products of competitors etc. In the worst case, the the direction of growth can change so drastically that any capital budgeting decision under consideration cannot be helpful and result in complete loss of money.

The following are the impact of the market risks:

1. Competitors pricing adversely impacting Company's Pricing: This is true for companies which do not have sustainable pricing power on their customers. The competitor may lower the price of goods/services to an extent that the company has to lower in response to the competitor's move.

2. Changes in Exchange Rates: For companies that undertake investments, allocation of funds at international level or having a market at an international level can get impacted adversely with changes in exchange rates.

3. Changes in the market forces: Market forces such as demand and supply can deeply impact the business. Reduced demand can affect the sales of the company negatively. This could be due to substitutes that offer better quality at lower price.

4. Changes in Policies: Countries with least stable Governments or where there is a constant change in policy reforms can affect the business, sales its investment decision reducing the feasibility of the entire project. In worse cases, it can render entire capital project useless if the policies are not supportive.

jeff jeffy answered 11 months ago

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