Risk Analysis Capital Budgeting
Risk Analysis in Capital Budgeting
Capital budgeting entails making various decisions in the management of an organization with the aim of determining expenditures on assets. In most cases, these particular expenditures are those that the management expects that their cash flow might extend within a period of about one year. Capital budgeting is a significant process in the management of an organization because it acts a control tool. This is because all capital expenditures that an organization expects to inquire within a certain period require large investments. However, most of these expenditures tend to be limited by availability of funds. Capital budgeting plays a significant role in influencing an organization's ability to achieve the set financial goals.
Capital budgeting and Risks
There is always a possibility of an organization to experience various uncertainties especially if the management fails to recognize the outcome of an event when dealing with assets. The element of risk occurrence is high especially when the assets have a cash flow that extends a period of more than one year. In order to curb the occurrence of various risks, the management of an organization needs to have the recommendable knowledge on the evaluations of the most expected risks (Baker & English, 2011). This means that the management ought to have the propensity to recognize and comprehend various uncertainties that might be surrounding key variables related to the expenditures. Moreover, the management ought to have the recommended tools and methodology in order to be able to process its risks implications. The management of an organization has the obligation of reflecting various risks that tend to be an obstacle in achieving financial objectives (Jackson, 2008). The most common types of risks that are separate and distinct include the following:
Stand-alone Risk
This refers to a type...
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