• Net present value
• Modified Internal Rate of Return
• Internal Rate of Return
Besides these methods, other methods that are used include Return on Investment (ROI), Accounting Rate of Return (ARR), Discounted Payback Period and Payback Period.
The different types of risks that are faced by entrepreneurs regarding capital budgeting are the following: • Corporate risk
• International risk
• Stand-alone risk
• Competitive risk
• Market risk
• Project specific risk
• Industry specific risk
Capital Budgeting and Risk
Uncertainties can exist when the outcome of an event is not known for certain, and when dealing with assets whose cash flows are expected to extend beyond one year, certainly, there’s element of risk in that situation. The evaluation of risk therefore depends, on decision maker ability to identify and understand the nature of uncertainty surrounding the key variables and on the other, having the tools and methodology to process its risk implications
The following methods are used for Risk Analysis in Capital Budgeting:
Sensitivity Analysis: This is also known as a "what if analysis". Because of the uncertainty of the future, if an entrepreneur wants...