We begin by describing what we mean by risk in the

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Unformatted text preview: budgeting decision. We begin by describing what we mean by risk in the context of long-lived Capital budgeting & risk, a reading prepared by Pamela Peterson Drake 1 projects. We then propose several commonly used statistical measures of capital project risk. Then we look at the relation between risk and return, specifically for capital projects. And we follow with how risk can be incorporated in the capital budgeting decision and how it is applied in practice. A. Risk Risk is the degree of uncertainty. When we estimate (which is the best we can do) what it costs to invest in a given project and what its benefits will be in the future, we are coping with uncertainty. The uncertainty arises from different sources, depending on the type of investment being considered, as well as the circumstances and the industry in which it is operating. Uncertainty may due to: • • • • • Economic conditions -- Will consumers be spending or saving? Will the economy be in a recession? Will the government stimula...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

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