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The Incorporation of Risk in The Capital Investment Decision. 5 th class of Seminar in Finance Management By: Caroline Eva Mursito / 16943. The Articles. From the CRP (Course Reading Package): Capital Budgeting: NPV v. IRR Controversy

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the incorporation of risk in the capital investment decision

The Incorporation of Risk in The Capital Investment Decision

5th class of Seminar in Finance Management

By:

Caroline Eva Mursito / 16943

the articles
The Articles
  • From the CRP (Course Reading Package): Capital Budgeting: NPV v. IRR Controversy
  • From the student: The Incorporation of Risk in The Capital Investment Decision
the reasons
The Reasons
  • To know the development in South Africa.
  • To know the importance of risk with regard to capital investment projects.
  • To know whether risk is incorporated or not when South African companies evaluate capital investment projects.
theory used by the articles
Theory Used by The Articles
  • From The CRP
    • NPV
    • IRR
  • From The Student
    • Risk
    • Capital Investment
hypothesis of the research
Hypothesis of The Research
  • From The CRP
    • NPV and IRR method is plain mathematics and does not pretend to be ranking device.
  • From The Student
    • Although there are different approaches regarding the determination of risk, companies in general do not use these approaches with regard to their application to capital investment decisions.
    • The incorporation of risk in the capital budgeting decision should not be altered by the size of the capital budget.
    • Companies do make adjustments for inflation when analyzing capital investment decisions.
variables used in the research
Variables Used in The Research
  • From The CRP
    • I

100

  • From The Student
    • Annual capital budget
    • Annual sales
    • Risk analysis techniques
method of analysis
Method of Analysis
  • From The CRP
    • NPV
    • IRR
  • From The Student
    • Questionnaires:
      • Categorize the data of the various responses.
      • Examined the capital budgeting techniques used in the capital investment process.
    • SAS (Statistical Analysis System)
result of analysis
Result of Analysis
  • From The CRP
    • NPV and IRR are not two measures of investment worth, they are just two sides of one and the same method.
  • From The Student
    • South African companies prefer ROI and IRR as methods to determine the feasibility of capital investment projects.
    • Risk analysis and evaluation in practice is neglected by South African companies.
    • The larger the annual capital budget, the more a company tends to use sensitivity analysis, while smaller companies tend not to use any formal risk technique.
conclusion
Conclusion
  • From The CRP
    • NPV and IRR follow the very same method.
    • NPV is a function of the discount rate, a curve in the flat plane.
    • IRR concern in the invested capital.
  • From The Student
    • Hypothesis 1 tested true. Approaches regarding the determination of risk and the application to capital investment decisions as described in the literature study are generally not used by South African companies.
    • Hypothesis 2 tested negative, as companies with a smaller capital budget make even less use of risk-adjusted methods when evaluating capital investment decisions than those companies with a relatively larger capital expenditure program.
    • Hypothesis 3 tested positive, as nearly 56% of companies make adjustments for inflation in the capital budgeting process.
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