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Learning Objectives

Learning Objectives. Describe the concept of risk based on the uncertainty of future cash flows. (LO 1 ) Characterize most investors as risk averse. (LO 2 ) Analyze risk as standard deviation, coefficient of variation or beta. (LO 3 )

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Learning Objectives

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  1. Learning Objectives • Describe the concept of risk based on the uncertainty of future cash flows. (LO1) • Characterize most investors as risk averse. (LO2) • Analyze risk as standard deviation, coefficient of variation or beta. (LO3) • Integrate the basic methodology of risk-adjusted discount rates for dealing with risk in capital budgeting analysis. (LO4)

  2. LO4 Risk and the Capital Budgeting Process • adjusting the discount rate to reflect the risk level associated with an investment proposal • converting cash flows to their certainty equivalents • simulating various economic and financial outcomes with the help of a computer • testing the sensitivity of a project’s success to some key variables • using a decision tree

  3. LO4 Figure 13-5 Relationship ofrisk to discountrate

  4. LO4 Table13-3 Risk classes and associated discount rates

  5. LO4 Table 13-4Capital Budgeting Analysis

  6. LO4 Table 13-5Capital budgeting decision adjusted for risk

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