ADJUSTMENT OF RISK AND UNCERTAINTY IN CAPITAL BUDGETING DECISION
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Advanced Business and Financial Management — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What is risk in the context of capital budgeting decisions?
Risk refers to the variability of actual returns from expected returns on a capital investment. It arises because future cash flows cannot be predicted with certainty.
What is the main objective of adjusting risk in capital budgeting decisions?
To account for uncertainty and obtain a realistic project value.
How does uncertainty differ from risk in capital budgeting?
Risk involves situations where probabilities can be assigned to possible outcomes, while uncertainty refers to situations where even the probabilities of outcomes are unknown. Uncertainty is a higher level of unpredictability than risk.
What does a certainty equivalent coefficient less than 1 indicate?
The project's cash flows carry some degree of risk.
What is the Risk-Adjusted Discount Rate (RADR) method?
RADR is a technique where a risk premium is added to the risk-free discount rate to account for the riskiness of a project. Higher-risk projects are discounted at a higher rate, reducing their NPV.
Which capital budgeting risk method uses Monte Carlo simulation?
Simulation Analysis method uses Monte Carlo simulation.
How is the risk premium determined under the RADR approach?
The risk premium is determined based on the perceived riskiness of the project, often using management judgment, market data, or the Capital Asset Pricing Model (CAPM). It is added to the risk-free rate to arrive at the risk-adjusted rate.
What is a 'pessimistic' scenario in scenario analysis used for?
To estimate project NPV under worst-case conditions.
Video classes for this chapter
ADJUSTMENT OF RISK AND UNCERTAINTY IN CAPITAL BUDGETING DECISION
ADJUSTMENT OF RISK AND UNCERTAINTY IN CAPITAL BUDGETING DECISION
ADJUSTMENT OF RISK AND UNCERTAINTY IN CAPITAL BUDGETING DECISION
ADJUSTMENT OF RISK AND UNCERTAINTY IN CAPITAL BUDGETING DECISION PART 2
ADJUSTMENT OF RISK AND UNCERTAINTY IN CAPITAL BUDGETING DECISION PART 1
ADJUSTMENT OF RISK AND UNCERTAINTY IN CAPITAL BUDGETING DECISION
More chapters in Module B - Advanced Concepts of Financial Management
Master the full ABFM syllabus
Every chapter of Advanced Business and Financial Management — videos, tests, notes and one-liner decks in one place.