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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

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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.


The incorporation of risk in the capital investment decision

Thank You

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