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Evaluating the Value of the Project - Essay Example

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This essay "Evaluating the Value of the Project" teaches to evaluate the value of the project practically. The writer states that although every risk can be avoided, every profitable project has some risk, so in order to avoid risk, huge amounts of profits will also be missed…
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Evaluating the Value of the Project
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Download file to see previous pages Market risks that are the changes in market prices will impact the portfolio, liquidity risk that is the risk of higher cash outflows than the cash inflows leading to shortages of funds or operational risk that is technical failure or any fraudulent activity in the corporation.
Therefore every project has to be evaluated whether the value the project is delivering is enough to take the risk accompanied by the project. For this purpose Net Present Value is used as a benchmark in decision making.
Net Present Value: To add value to the firm, the management has to take certain decisions regarding which projects should be undertaken and which should be disregarded? For this purpose discounted cash flow technique is used known as Net Present Value (Wang, 2003).
Risk management activities are divided based on the probability of failure and the consequence it would hold in case of failure. There are four risk management activities (Spaulding, 2005): The risk Matrix below (Alexander and Marshall, 2006)
Risk-retention is accepting the risk, evaluating how much loss it can incur then allocating funds to compensate for the risk. Risk-retention is the best strategy when the probabilities of failure as well as the consequences of failure are the lowest. Value at risk is determined and a pool is created to make for that loss.
Retention is a sort of self-insurance. Retention groups are made to avoid the high cost of the insurance premium that is incurred if insurance is made for the losses that might incur in the long run through regular insurance companies. Self-insurance is also used if a regular insurance facility is not available in the area of operations.
All losses incurred are net cash outflows. Other cash outflows include corporate income tax payments as well as interest payments while other gains are cash inflows. Risk-adjusted LIBOR taken as discount rates are considered while Initial Investment includes risk pool set apart to account for losses. ...Download file to see next pagesRead More
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