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The Incorporation of Risk in The Capital Investment Decision

Explore risk incorporation in capital investments by South African companies using NPV, IRR, and risk analysis techniques. Understand the impact on decision-making and adjustments for inflation.

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The Incorporation of Risk in The Capital Investment Decision

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  1. The Incorporation of Risk in The Capital Investment Decision 5th class of Seminar in Finance Management By: Caroline Eva Mursito / 16943

  2. The Articles • From the CRP (Course Reading Package): Capital Budgeting: NPV v. IRR Controversy • From the student: The Incorporation of Risk in The Capital Investment Decision

  3. The Reasons • To know the development in South Africa. • To know the importance of risk with regard to capital investment projects. • To know whether risk is incorporated or not when South African companies evaluate capital investment projects.

  4. Theory Used by The Articles • From The CRP • NPV • IRR • From The Student • Risk • Capital Investment

  5. Hypothesis of The Research • From The CRP • NPV and IRR method is plain mathematics and does not pretend to be ranking device. • From The Student • Although there are different approaches regarding the determination of risk, companies in general do not use these approaches with regard to their application to capital investment decisions. • The incorporation of risk in the capital budgeting decision should not be altered by the size of the capital budget. • Companies do make adjustments for inflation when analyzing capital investment decisions.

  6. Variables Used in The Research • From The CRP • I 100 • From The Student • Annual capital budget • Annual sales • Risk analysis techniques

  7. Method of Analysis • From The CRP • NPV • IRR • From The Student • Questionnaires: • Categorize the data of the various responses. • Examined the capital budgeting techniques used in the capital investment process. • Examined the various techniques used for risk evaluation. • SAS (Statistical Analysis System)

  8. Result of Analysis • From The CRP • NPV and IRR are not two measures of investment worth, they are just two sides of one and the same method. • From The Student • South African companies prefer ROI and IRR as methods to determine the feasibility of capital investment projects. • Risk analysis and evaluation in practice is neglected by South African companies. • The larger the annual capital budget, the more a company tends to use sensitivity analysis, while smaller companies tend not to use any formal risk technique.

  9. Conclusion • From The CRP • NPV and IRR follow the very same method. • NPV is a function of the discount rate, a curve in the flat plane. • IRR concern in the invested capital. • From The Student • Hypothesis 1 tested true. Approaches regarding the determination of risk and the application to capital investment decisions as described in the literature study are generally not used by South African companies. • Hypothesis 2 tested negative, as companies with a smaller capital budget make even less use of risk-adjusted methods when evaluating capital investment decisions than those companies with a relatively larger capital expenditure program. • Hypothesis 3 tested positive, as nearly 56% of companies make adjustments for inflation in the capital budgeting process.

  10. Thank You For Your Attention

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