Risk Analysis in Investment Appraisal

The methodology and uses of Monte-Carlo simulation technique are presented as applied to the analysis and assessment of risk in the evaluation of investment projects. The importance of risk analysis in investment appraisal is highlighted and the stages in the process introduced. The results generated by a risk analysis application are interpreted, including the investment decision criteria and measures of risk based on the expected value concept. Conclusions are drawn regarding the usefulness and limitations of risk analysis in investment appraisal.risk analysis; investment appraisal; Monte Carlo simulation; project evaluation; measures of risk; investment decision criteria

Risk Analysis in Investment Appraisal

This paper was prepared for the purpose of presenting the methodology and uses of the Monte Carlo simulation technique as applied in the evaluation of investment projects to analyse and assess risk. The first part of the paper highlights the importance of risk analysis in investment appraisal. The second part presents the various stages in the application of the risk analysis process. The third part examines the interpretation of the results generated by a risk analysis application including investment decision criteria and various measures of risk based on the expected value concept. The final part draws some conclusions regarding the usefulness and limitations of risk analysis in investment appraisal.Risk Analysis; Monte Carlo simulation; Investment appraisal; Project analysis; Forecasting and simulation; Business administration

Particularities of Investment Projects in the Romanian Biodiesel Industry

The European biodiesel industry is currently facing major challenges with governments reducing their fiscal support for biodiesel producers and with rising prices for feedstock. These challenges have a high impact on the profitability and survival of existing investment projects in biodiesel production. In this regard identifying and assessing the main particularities of investment projects have high significance, as they help management understand industry dynamics and better cope with unfavorable events. The paper follows a structured approach towards this objective and analyzes investment projects in Romanian biodiesel based on: a thorough SWOT analysis, current financing sources for biodiesel, risk categories and their impact on profitability of investment projects.biodiesel, financing, project risks, profitability, projects.

A Real Options Perspective On R&D Portfolio Diversification

This paper shows that the conditionality of investment decisions in R&D has a critical impact on portfolio risk, and implies that traditional diversification strategies should be reevaluated when a portfolio is constructed. Real option theory argues that research projects have conditional or option-like risk and return properties, and are different from unconditional projects. Although the risk of a portfolio always depends on the correlation between projects, a portfolio of conditional R&D projects with real option characteristics has a fundamentally different risk than a portfolio of unconditional projects. When conditional R&D projects are negatively correlated, diversification only slightly reduces portfolio risk. When projects are positively correlated, however, diversification proves more effective than conventional tools predict.real options;portfolio analysis;research & development

Earthquake vulnerability reduction program in Colombia : a probabilistic cost-benefit analysis

Cost-benefit analysis is a standard tool for determining the efficiency of planned projects. But one of the major difficulties in risk mitigation investments is that benefits are by nature uncertain. In this context, the standard approach relying on the average value of benefits may provide an incomplete picture of the efficiency of the risk mitigation project under consideration. This paper presents a probabilistic cost-benefit analysis relying on a catastrophe risk model. It produces risk metrics such as the exceedance probability curve of the benefit-cost ratio, thus providing the decisionmaker with a more complete risk analysis of the net benefits of the project. This is illustrated with the earthquake vulnerability reduction project in Colombia.Insurance&Risk Mitigation,Investment and Investment Climate,Banks&Banking Reform,Natural Disasters,Non Bank Financial Institutions

Value-based approach to managing the risks of investing in oil and gas business

Development of the oil and gas business is inextricably linked to large-scale investment programs. Large-scale flow of capital funds, long duration of projects, as well as the external environment's high uncertainty for oil and gas businesses bring about the high-risk investing; and therefore, it becomes urgent to develop methodological tools for risk management issues. The authors' approach to risk management of capital investments allows an individual to estimate the risk level of an investment project on the basis of a ratings model, and to evaluate the need for capital to cover potential losses on the basis of the target level of financial stability and long-term strategy of the company. The authors' technique of RAROC (risk adjusted return on capital) analysis of investment projects allows to calculate the risk-adjusted return on investment and to carry out the selection of projects that contribute most to the creation of value and screen out those projects that destroy the company value. The results can be used by management of oil companies, investors, and analysts in financial decision-making. © 2017 WIT Press

THE RISK ANALYSIS FOR INVESTMENTS PROJECTS DECISION

The risk signifies the possibility of existence of one situation in which the obtainedresults are far from the targeted objectives. Assuming the risk by the entrepreneurs becomes thesource of profit within the economy; this is the reason why its analysis is a prior objective insubstantiating decisions related on the investments efficiency. In the paper there are presentedsome categories of risks that can appear within the investment activity and is exemplified the riskanalysis on the base of studying the projects sensitivity.investments, risk, economic performance, sensitivity analysis

The determinants of private sector and multilateral development agencies' participation in infrastructure projects

Much more investment will be needed in developing countries to achieve the Millennium Development Goals, specifically, the goal of reducing poverty. In this respect, private-sector investment is critical, bringing more funds, expertise, and efficiency to the development of projects in several essential areas, like energy, transport, water, and telecommunications. Complementarily, the involvement of Multilateral Development Agencies (MDA) plays an important "enabling" function, acting like a mechanism of risk reduction and enhancing credit. To address these unexplored topics, I perform an empirical analysis of the cross-country determinants of private sector and MDA participation in infrastructure Public Private Partnerships; for this analysis, I use data from developing countries, which was acquired from the World Bank's Private Participation in Infrastructure database. The results suggest the following: the participation of MDA is higher for less populous and poorer countries. Yet neither level of political risk of a country nor respect for human rights seems to play any role in explaining multilateral participation in projects. Concerning private-sector participation, proxies for the country's economic risk are more relevant. The private sector seems to prefer investing in projects located in richer and less populous countries. Also statistically relevant is the country's legal origin and whether the project has MDA participation.

Risk and profitability optimization of investments in the oil and gas industry

Finding an optimum ratio of return and risk of investment projects is the key problem in overcoming the unfavorable conditions of oil prices and the reduction of profitability of the oil and gas industry. Search for investment opportunities associated with the potential willingness of oil companies to raise funds in new projects, leading to the need for improved tools maximize the return of investment activity in the conditions of uncertainty and risk. In the article the authors propose an original approach which allows solving the problem of formation of a portfolio of investment projects that achieve the maximum return on the risks assumed. The approach includes a method for determining the credit quality of the investment project on the basis of probability of default. This method is based on a comprehensive multivariate analysis of the investment project. Factors model aimed at the country and regional analysis, identification of foreign exchange, operational, technological and financial risks of the project and obtaining the integral evaluation of the project credit. The approach also includes economic capital modeling based on the MV-model (Merton-Vasicek-model), allowing achievement of the target level of creditworthiness of an oil and gas company in the long run. The proposed method of estimating project profitability is based on RAROC (risk-adjusted return on capital) methodology which enables calculation of profitability of projects based on their riskiness. The results can be used by management of oil and gas companies, investors and analysts in making financial decisions.The work was supported by the Act 211 Government of the Russian Federation, contract № 02.A03.21.0006

A Probabilistic Alternative Approach to Optimal Project Profitability Based on the Value-at-Risk

This paper focuses on an investment decision-making process for sustainable development based on the profitability impact factors for overseas projects. Investors prefer to use the discounted cash-flow method. Although this method is simple and straightforward, its critical weakness is its inability to reflect the factor volatility associated with the project evaluation. To overcome this weakness, the Value-at-Risk method is used to apply the volatility of the profitability impact factors, thereby reflecting the risks and establishing decision-making criteria for risk-averse investors. Risk-averse investors can lose relatively acceptable investment opportunities to risk-neutral or risk-amenable investors due to strict investment decision-making criteria. To overcome this problem, critical factors are selected through a Monte Carlo simulation and a sensitivity analysis, and solutions to the critical-factor problems are then found by using the Theory of Inventive Problem Solving and a business version of the Project Definition Rating Index. This study examines the process of recovering investment opportunities with projects that are investment feasible and that have been rejected when applying the criterion of the Value-at-Risk method. To do this, a probabilistic alternative approach is taken. To validate this methodology, the proposed framework for an improved decision-making process is demonstrated using two actual overseas projects of a Korean steel-making company.111Nsciessciscopu