Blog 9

Impact on risk-and the nature of investment appraisal tools.

In the lecture today we have been looking at payback,net present value and rate of return. We would need to find out that the objective is MSW, With a cash flow you need to find the mark which was the initial investment and that would mean you start getting payback. To consider a project you need to move away from profit as a key benchmark. NPV is the best method when choosing an investment.

Some business sectors are riskier than others, You would use the beta value which is the calculated risk for each industry. The higher the risk the higher the return. Projects can be sensitive when costs increase, You need to make sure that it is still viable. A sensitivity analysis needs to be undertaken, An example of this would be the oil industry as this is sensitive at the moment with the libyian crisis. Costs may go up due to importing into the UK and shortages of oil. When a hurdle rate is set a premium for business risk needs to be considered as there would be an uncertainty, A fair market would be a price that is appropriate to that industry. You would never accept a project lower than this but every project you take on it will affect your weighting cost of capital so you will have to re-run your figures every time you do a new project and im sure that would definately fluctuate within the oil industry.