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CAPITAL BUDGETING  IN  
UNCERTAINTY
Page 2


CAPITAL BUDGETING  IN  
UNCERTAINTY
Capital budgeting 
Capital budgeting is the planning process used 
to determine whether an organization's long term 
investments such as new machinery, replacement 
machinery, new plants, new products, and 
research development projects are worth the 
funding of cash through the firm's capitalization 
structure.
Page 3


CAPITAL BUDGETING  IN  
UNCERTAINTY
Capital budgeting 
Capital budgeting is the planning process used 
to determine whether an organization's long term 
investments such as new machinery, replacement 
machinery, new plants, new products, and 
research development projects are worth the 
funding of cash through the firm's capitalization 
structure.
INTRODUCTION 
? What is the difference between risk 
and uncertainty 
? what methods are use un uncertainty
? How can decision makes effective
Page 4


CAPITAL BUDGETING  IN  
UNCERTAINTY
Capital budgeting 
Capital budgeting is the planning process used 
to determine whether an organization's long term 
investments such as new machinery, replacement 
machinery, new plants, new products, and 
research development projects are worth the 
funding of cash through the firm's capitalization 
structure.
INTRODUCTION 
? What is the difference between risk 
and uncertainty 
? what methods are use un uncertainty
? How can decision makes effective
Risk and uncertainty both refer to 
situation with more than one 
outcomes.
Page 5


CAPITAL BUDGETING  IN  
UNCERTAINTY
Capital budgeting 
Capital budgeting is the planning process used 
to determine whether an organization's long term 
investments such as new machinery, replacement 
machinery, new plants, new products, and 
research development projects are worth the 
funding of cash through the firm's capitalization 
structure.
INTRODUCTION 
? What is the difference between risk 
and uncertainty 
? what methods are use un uncertainty
? How can decision makes effective
Risk and uncertainty both refer to 
situation with more than one 
outcomes.
Read More
44 videos|75 docs|18 tests

FAQs on PPT - Risk and Uncertainty In Capital Budgeting - Accountancy and Financial Management - B Com

1. What is risk in capital budgeting?
Ans. Risk in capital budgeting refers to the potential for loss or failure in an investment decision. It involves the uncertainty and variability of expected returns, which may be influenced by factors such as market conditions, competition, technological changes, and government regulations.
2. How is risk measured in capital budgeting?
Ans. Risk in capital budgeting can be measured using various techniques such as sensitivity analysis, scenario analysis, and simulation analysis. Sensitivity analysis measures the impact of changes in key variables on the project's profitability. Scenario analysis evaluates the project's performance under different scenarios. Simulation analysis involves creating multiple simulations to assess the project's risk and uncertainty.
3. What is uncertainty in capital budgeting?
Ans. Uncertainty in capital budgeting refers to the lack of knowledge or predictability about future outcomes. It arises due to factors such as economic conditions, market dynamics, technological advancements, and regulatory changes. Uncertainty makes it difficult to accurately estimate cash flows, discount rates, and project outcomes, making investment decisions more challenging.
4. How does risk and uncertainty affect capital budgeting decisions?
Ans. Risk and uncertainty affect capital budgeting decisions by introducing potential financial losses, opportunity costs, and decision-making complexity. Higher levels of risk and uncertainty may require higher discount rates, reducing the project's net present value and attractiveness. Decision-makers may also need to consider alternative investment options or implement risk management strategies to mitigate the impact of risk and uncertainty.
5. What are some risk management techniques used in capital budgeting?
Ans. Risk management techniques in capital budgeting include diversification, sensitivity analysis, scenario analysis, real options analysis, and insurance. Diversification involves spreading investments across different projects or asset classes to reduce risk. Sensitivity analysis assesses the impact of changing key variables on project profitability. Scenario analysis evaluates various possible scenarios to understand the project's performance. Real options analysis considers the flexibility to adapt the project based on changing conditions. Insurance can be used to transfer certain risks to an insurer.
44 videos|75 docs|18 tests
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