Abstract

Evaluating whether a company should invest in a capital project requires an analysis of whether the project adds value to the company. Essential in the analysis of the attractiveness of a capital project is an assessment of the project's risk. The analysis of the risk of a project is challenging because most capital projects are unique and a project's contribution to the company's risk is difficult to quantify. There are several tools available to help incorporate a project's risk into the decision. These tools include the incorporation of a project's market risk in the cost of capital, as well as the use of the adjusted present value. An alternative to the traditional approaches is the use of real options, which can be used to estimate the value of any options associated with a capital project. Keywords: capital budgeting; risk; total risk; stand-alone risk; sensitivity analysis; scenario analysis; simulation analysis; pure play; adjusted present value (APV); real options valuation (ROV); strategic net present value (NPV); certainty equivalent

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.