Project Management

SUMMARY: While appraising a project, it was assumed in the earlier chapters that the new project undertaken by a firm will have the same risk as existing projects. This, however, does not happen practically because there are many factors that affect the risk surrounding the new project. Risk in a project is variability of the cash flows. There are different types of risks affecting the cash flows, and they are broadly divided into business risk and financial risk. Therefore, risk adjusted investment appraisal techniques help in making better judgment about the financial viability of the project. The certainty equivalent method and risk adjusted discount rate method are used by the project manager to analyze the risks involved in each project investment. Some advanced techniques like sensitivity analysis, scenario analysis, simulation approach, and decision tree analysis have also been developed for this purpose.