Implementation of risk in the evaluation of investment projects

Abstract

Making the investment decisions means making some of the most subtle and most important decisions with long-term implications. Investors expect their investments to bring them returns greater than the invested funds, i.e. they want the projects to achieve a positive net present value. Since investing means making an investment in the present in order to achieve certain effects in the future, the risk is an inevitable part of the investment process. It refers to uncertainty that the expected effects of the project mayl not be achieved, or may not reach those expected. Risk and uncertainty are some of the main characteristics of any project. The risk of an investment project is the variability of the project cash flows in relation to the expected flows. The project with higher variability of net cash flows and lower probability of acceptance is more risky than a project whose cash flows are more stable and with a better chance of acceptance. The degree of risk of the projects varies according to the nature of projects. In assessing the risk of the project, the Sensitivity analysis, the Scenario analysis, the Simulation analysis, and the Decision Tree analysis are used. The scope of this paper is the identification and explanation of the risk sources, factors and types present in investment projects. The aim is to identify, explain and illustrate with practical examples the methods for measuring the risk of investment projects and its impact on the cost of capital. Starting from the above objective, the following hypothesis is defined: there is no universal method of evaluating the risk of investment projects and measuring its impact on the cost of capital, which is applicable in any circumstances. To prove or to dispute the above hypothesis, the paper is based on the descriptive and analytical methods.