RISK

ANALYSIS
 RISK ANALYSIS
Introduc1on

List of elements where risks are associated

with the project
Periodic cash ou@lows
Periodic cash inows
Life of machinery
Salvage value of machinery
RISK v/s UNCERTAINTY
 RISK v/s UNCERTAINTY
Risk can be dened as the variability of
return from an investment.
If probabili1es of possible outcomes of a given
project are known, we can conclude that the
project contains risk i.e. the project is risky.
If probabili1es of possible outcomes of a given
project are not known, we can conclude that
the project has an element of uncertainty.
 KINDS OF PROJECT RISKS
1. Project comple1on risks
2. Resource risks
3. Price risk
4. Technology risk
5. Poli1cal risk
6. Interest rate risk
7. Exchange rate risk
 PRINCIPLES OF RISK MANAGEMENT
The process should create value
It should be an integral part of the organiza1onal process
It should factor into the overall decision making process
It must explicitly address uncertainty
It should be systema1c and structured
It should be based on the best available informa1on
It should be tailored to the project
It must take into account human factors
It should be transparent and all-inclusive
It should be dynamic and adaptable to change
It should be con1nuously monitored and improved upon
as the project moves forward
 TECHNIQUES OF RISK ANALYSIS

1. Break even analysis

2. Sensi1vity analysis
3. Decision tree analysis
4. Monte-Carlo simula1on technique
5. Game theory
CYCLICAL NATURE OF RISK ANALYSIS
Update
risk Perform risk
analysis analysis

Evaluate Choose
control control
measures measures

Implement
control
measures
BREAK EVEN POINT
 BREAK EVEN POINT
BEP refers to the level of opera1on at which the
project neither earns prots nor incurs loss.
Calcula1on of BEP at the given cost & price levels
indicate the minimum capacity u1lisa1on that
the project should aim at in order to be at a no-
prot; no loss situa1on.
BEP also helps is iden1fying a level of prot or
loss for a specied level of opera1on & the level
of opera1on required to again a specied prot
or avoid a specied loss.
 BEP - COSTING
Fixed costs Variable costs
Rent payable for land Consumables
Rent payable for factory Power , water charges,
premises fuel
Insurance on xed assets Input or raw materials
Interest on long term
loans
AMCs
Property tax
BREAK EVEN POINT GRAPH
 BEP FORMULA

BEP (no. of units) = Fixed costs/ (S. P. per unit

V. C. per unit)
 CONTRIBUTION

Contribu1on is the dierence between the

sales realisa1on & the variable cost.
Excess of selling price over variable cost is
termed as Contribu1on.
Basically, its a contribu1on towards xed costs
& prots.
BEP (units) = Fixed costs / contribu1on
 EXAMPLE
Details of produc1on costs & revenues of a
project are as under
Total cost = Rs. 65,000/-
Fixed costs = Rs. 25,000/-
Sales (8000 units) = Rs. 80,000/-

Find BEP in terms of no. of units. What should be

the output if the prot desired is Rs. 20,000/-
 EXAMPLE
Project details
Output (nos.) per annum = 6,00,000
Expected sales revenue per annum = Rs.
3,00,00,000/-
Fixed costs = Rs. 70,00,000/-
Variable cost = Rs. 1,32,00,000/-
Calculate BEP.
SENSITIVITY ANALYSIS
 SENSITIVITY ANALYSIS
It is a technique that measures the change in the
protability of a project caused by changes in the
factors that aect the cash inows of the project.
If a small change in one of factor leads to a large
change in the protability of the proposed
investment, the project is considered to be
sensi1ve to that factor.
Other things being equal, a project less sensi1ve
is preferred to a project which is more sensi1ve.
 EXAMPLE
Project details
Output (nos.) per annum = 3,00,000
Expected sales revenue per annum = Rs. 1,50,00,000/-
Fixed costs = Rs. 35,00,000/-
Variable cost = Rs. 66,00,000/-
Calculate BEP.
what is the eect on BEP if
The price comes down to Rs. 40/- per unit.
The xed cost increases to Rs. 40,00,000/-
The variable cost increases by 10%
Tabulate your results & determine the sensi1vity.