Analysis of Project Risk

8/2/2019 Analysis of Project Risk

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JINCY C K

ROLL NO: 11


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A project simply refers to any investment

opportunity which is to be exploited for

profit. Project is an idea or plan which is

intended to be carried out. It may consist ofa new product, new service, new

organisation, new business or a new process.


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i. Aprojectinvolvesinvestmentofmoney

andmoneysworth.

ii. Itisariskyventure.

iii. Ithasafixedsetofobjectives.

iv. Everyprojecthasriskanduncertainty

associatedwithit.

v. Aprojectrequiresteamwork.

vi. Ithasalifecyclereflectedbygrowth,

maturityanddecay.


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Everyinvestmentischaracterised byreturn

andrisk. Ingeneral,itreferstothe

possibilityofincurringalossinafinancial

transaction.


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This possibility of variation of the actual return

from the expected return is termed risk.

Risk arises where there is a possibility of variation

between expectations and realizations withregard to an investment.

Total risk = systematic risk+ unsystematic risk


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Theimpactofeconomic,politicalandsocial

changesissystem-wideandthatportionof

totalvariabilityinsecurityreturnscausedby

suchsystem-widefactors isreferredtoassystematicrisk. Systematicriskisfurther

subdividedinto

Interestraterisk

Marketrisk Purchasingpowerrisk


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The returns from a security may sometimes

vary because of certain factors affecting only

the company issuing such security,

Eg: labour strike, management inefficiencyWhen variability of return occurs because of

such firm-specific factors, it is known as

unsystematic risk.


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Completing the project in time and within

the estimated cost itself is a major

achievement. A project that is delayed

will result in time over-run which willconsequently result in cost over-run.

There can be also technology failures,

which may result in non-completion of

project.


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Raw material, power, fuel, manpower etc., are

the resources used by a project. Shortage of

raw material may lead to reduction in

capacity utilization and higher cost ofproduction, which will make all profitability

estimates wrong.


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Price fluctuations of both inputs and

outputs affect the project. Unforeseen

happenings such as Governments

intentions in price fixation, ability ofcompetitors to offer their product to

customers at a comparatively cheaper

price etc., are likely to have an effect.


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Fluctuations in interest may bring in an

adverse effect.

If the interest rate increases in future, the

interest on working capital finance increaseswhich will result in lower profit margins than

estimated at the time of project appraisal.


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Technology risk may appear in two

forms. A project that is based on unproven

technology may have hidden defects which

may make the project a non-starter. Rapidgrowth in technology may make a project

obsolete in technology due to the evolution

of latest technology.


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The Government intervenes in many forms

such as levying and regulating taxes,

regulating monopolistic trade practices,

imposing import duties, promoting exports,prohibiting export of certain commodities,

issuing import licenses, controlling foreign

exchange transactions, price controls etc.

Political risk is a major risk since it cannot bepredicted easily.


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Exchange rate risk also called currency risk. It

is the risk arising from currency fluctuations.

Volatile exchange rates can reduce cost and

productivity advantages gained over years ofhard work. Firms exposed to international

economy face this risk. When a firm has

already committed to a foreign currency

denominated transaction, the firm is exposedto exchange rate risk.


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Analysis of Project Risk

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