Risk and Capital Budgeting: Impacts and How to Mitigate Risks

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Table of Contents

Introduction
How Risk Impacts Capital Budgeting
Mitigating Risk to Attract Investors
Conclusion
References

Introduction

The decision to fund a project may give rise to uncertainties; this forces a company to undertake the necessary research to understand its operating environment. Identifying corporate risk in capital budgeting is the most important aspect of project management. The level of risk related to management implies that the entity with good performance will eventually attract competition, thus leading to a decline in profitability.

How Risk Impacts Capital Budgeting

Capital budgeting is a plan associated with an investment in long-term assets. The risks associated with capital budgeting may include cash flow inadequacy and management sinking the investing funds in risky projects. The perils related to capital planning may also include stand-alone risks, commercial risks, and market-related risks (Anton, 2018). Each of these risks addresses an area in which volatility could alter the budgeting plan. Risks can lead to poor budgeting, thus influencing the outcome of the budgeting process.

The progress of any investment project will depend on the volatility of the environment. Failure to plan for uncertainties may eventually lead to project failure. There are usually uncertainties in every aspect of project management that may influence the capital budgeting protocols. Failure to plan for risk in capital budgeting will eventually lead to uncertainty shock, thus delimiting goals of capital budgeting and failure of the specific investment project.

Mitigating Risk to Attract Investors

Risk mitigation and planning process helps in reducing the impacts, especially to the sport project investors. The capital budgeting team can plan to avoid risks and ensure the projects are done in relation to the proposed risk avoidance mechanisms (Rajagopal et al., 2017). The other idea is to include risk management in sports projects and communicating the risk to others. The project management team should implement risk responses as early as possible and track them regularly.

Conclusion

Every aspect of life, whether in capital budgeting or project management process, will attract uncertainties. The management team needs to highlight the various ways in which risks can influence the success of a particular project. However, the important aspect is highlighting means of addressing uncertainties to attract investors and achieve the capital budgeting plans. Communication is an essential factor in managing uncertainties, especially during the management of foreign-invested projects.

References

Anton, S. G. (2018). The impact of enterprise risk management on firm value: Empirical evidence from Romanian non-financial firms. Engineering Economics, 29(2), 151-157.

Rajagopal, V., Venkatesan, S. P., & Goh, M. (2017). Decision-making models for supply chain risk mitigation: A review. Computers & Industrial Engineering, 113, 646-682.

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Risk and Capital Budgeting: Impacts and How to Mitigate Risks

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