How would you define and quantify risk as used in capital budgeting analysis?
DISCUSSION 1
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Get Help Now!Risk involves financial variables susceptibility to negative changes from planned events. According to Zemke (2015) financial plans are based on consistencies of income and liabilities. After all, the essential business function to utilize either cash on hand, or borrow money to develop a product or service to gain a greater return. Risk associated with liabilities present themselves when a business is unable to pay its liabilities, cannot acquire financing, or exposure to unfavorable interest rates.
According to Boundless.com (2015) capital budget risk can be an operational risk, financial risk, or market risk and can entail corporate risk, international risk, industry risk, market risk, stand-alone risk, or project risk. Blackman (2014) notes that measuring and quantifying risk is accomplished by determining probability and impact of potential risk.
Blackman, A (2014). How to Measure Risk in Your Business. Retrieved from http://business.tutsplus.com/tutorials/how-to-measure-risk-in-your-business–cms-22763
Boundless.com. (2015). Risks Involved in Capital Budgeting. Retrieved from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/the-role-of-risk-in-capital-budgeting-12/the-relationship-between-risk-and-capital-budgeting-96/risks-involved-in-capital-budgeting-421-7545/
Zemke, J. (2010). How to measure changes in the risk states – concept of definition. Journal of Applied Business Research, 26(5), 87-95. Retrieved from http://search.proquest.com/docview/750491980?accountid=35812
RESPONSE FROM THE TEACHER
You provide a satisfactory start to your discussion, but you never really address the question. You hit on capital budgeting and risk, but you do not explain how capital budgeting incorporates and quantifies risk within its framework for decision making. Hint: Look at the discount rate and/or the weighted average cost of capital…
I look forward to your elaboration on the topic
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