A Contemporary Issue Report

On
“Risk-Oriented Approach to Multi-Criteria Evaluation of
Investment Projects”
In Partial Fulfillment of the requirement of
Master of Business Administration Program Of

M. S. Patel Institute of Management Studies

Faculty of Management Studies (FMS-Baroda)
The Maharaja Sayajirao University of Baroda

Submitted By
ARPIT D SONI
Roll No: 34
Batch: 2017-2020
 DECLARATION

I Arpit soni declare that the report on ‘Risk-oriented approach to multi-criteria

evaluation of investment projects.” is the report of my own study which was
carried out by me during my study. This contemporary issue report is not being
submitted to any other University for award or for any other purpose.

I have completed the whole report solely and sincerely under the guidance of
“Ms. Smita Trivedi”, Assistant Professor, Faculty of Management
Studies, Vadodara. I have collected all the primary data all by myself during
this study. I have tried to see that this contemporary issue report attains all the
necessary standards led by the faculty. To the best of knowledge and belief,
no part of this report is copied or reproduced from any other report,
monograph or research paper.

I declare this work to be my original work.

Date:
Place: ARPIT D SONI

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 ACKNOWLEDGEMENT

The following lines are an ode to all the people who made this entire effort to
turn into result. I am thankful to Prof. (Dr.) Jayrajsinh. D. Jadeja(Dean,
Faculty of Management Studies, The M.S. University of Baroda, Vadodara)
for giving me this opportunity to experience the practical aspects during my
academic curriculum.

My warmest & most sincere thanks to my guide Asst. Prof.(Ms.) Smita

Trivedi, for her support, co-operation and motivation during the course of
project period. Her unending optimism and patience were a source of
immense learning.

Lastly, I would like to thank all my respondents of the questionnaire who

took out their valuable time and filled their options genuinely.

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 Abstract

In today’s Scenario there is a very urgent problem of developing advanced forms

and methods of management and implementing these methods in practice. Creating
a system of indicators (including the decision-making criteria) for the analysis and
predicting a problematic situation for the subsequent generation and selection of
alternatives are crucial steps of economic decision making .The quality of
decisions is largely determined by the choice of the best alternative.
.

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Table of Contents:

1. Introduction…………………………………………………………06

2. Factors Affecting the choice of the investment project…………..06

3. Types of project risk analysis………………………………………...08

4. Methodology & Findings……………………………………………..09

5. Summary……………………………………………………………10

6. Suggestion…………………………………………………………...11

7. Conclusion…………………………………………………………..12

8. References…………………………………………………………...13

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 INTRODUCTION

This article discusses the problem of investment decision making in conditions of

uncertainty and risk. Multi-component risk model as one of the criteria for the
decision making is offered. The study presents the algorithm of the multi criteria
choice while taking into account interval preference relation.

FACTORS AFFECTING THE CHOICE OF INVESTMENT PROJECTS.

For developing advanced forms and methods of management and
implementing these methods in practice the quality of decisions plays a vital role in
that situation.
The choice of the investment project directly depends on the evaluation of
efficiency of the analyzed alternatives. In case of strategic decisions this
circumstance should be taken into account to avoid spending substantial resources.
The versatility of economic activity cannot be expressed with a one-
dimensional indicator. Increasing attempts to reflect real conditions of decision-
making in the analysis explain the growing interest in multidimensional methods of
analysis and evaluation of economic decisions.
All enterprises involve investment activities to a varying extent. Investment
decisions include the necessity to take into account various complicating factors –
limited financial resources available for investment, actual investment, potential
losses if the project will be less effective than it is assumed at the time of its
creation. Risk assessment allows increasing the validity of project decision and
reducing probability of adoption of the ineffective project.
In economic theory, we know a large number of indicators that allow to
compare different investment alternatives. The literature most often recommends
using the following indicators: net present value (NPV), discounted payback period
(DPP), and internal rate of return (IRR). These indicators help making a decision
about the acceptance or rejection of a project, or help selecting the optimal
alternative from several possible options. However, they describe the effectiveness
of the analyzed project from a different point of view. This leads to the necessity to

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apply a multidimensional criterion. Two main methods for calculating the
“payback” indicator are described here,
The first approach takes into account the point of view of the owner of
capital. The payback period is calculated as the period over which the owner
makes a profit equal to the amount of capital invested. This implies that the project
at least provides the conditions of simple re-investment with a certain time factor.
An alternative method presents the point of view of the business manager. The
most important characteristic for him is the size of the NPV. In this case, the
payback period is determined as the time of the return of the NPV, which
compensates the amount of capital invested in the project.
A comparison of alternative projects on the basis of these parameters may
lead to a different ordering of analyzed alternatives. This is especially true when
you consider the dynamics of the various factors influencing the effectiveness of
projects. NPV reflects the opinion of the company’s management about the
effectiveness. Therefore it should be more effective to use the payback period
indicator calculated on the measurement of profit as a component of a
multidimensional criterion in our case.
On the basis of the indicator IRR another ordering can also be obtained.
Using this parameter allows you to partly solve the problem of comparing
investment projects with different amounts of capital investments and different
terms of implementation. However, at various discount rates preferences may be
different. Theoretically the same amount of investment and / or a term of
alternative projects is required. Typical recommendations for the calculation of
efficiency of investment projects suggest choosing the NPV indicator.
The above considerations lead to the conclusion about the need to evaluate
the effectiveness of alternative investment projects based on multi-criteria choice.
Identifying the most effective investment project requires an analysis of the best
combination of values related to diverse characteristics of the investment projects.
The need to evaluate alternative solutions in terms of several criteria is
complicated by the multiplicity of indicators for which it is difficult to obtain
accurate estimates due to the complexity of projects. Another serious problem is
that the investment projects are usually carried out in a risky environment. Such
risks may cause an increase or a decrease in cash flows generated by the
investment project. As a result, there is a chance that the objectives of the investor
will not be achieved, and investor will incur losses.

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 The size of losses and their probability determine the risk of each type of
business activity. Risk assessment of the alternative investment options is therefore
necessary.

TYPES OF PROJECT RISK ANALYSIS

There are two complementary types of project risk analysis: quantitative and
qualitative.
Qualitative analysis determines the factors, scope and types of risk. The aim
of quantitative analysis is to measure the identified risks and the potential damage
that would be caused by the failure of the investment project.
Variety of investment project risk seriously complicates the task of qualitative
analysis, including risk classification. The literature suggests different approaches
to solving this problem. It seems reasonable to classify the risks in terms of their
area of origin. Calculating economic efficiency in conditions of risk requires the
identification of risk factors in classified areas, the identification of risk situations,
as well as matching risk situations with corresponding consequences for the
investment project.
Quantitative risk analysis includes quantitative assessment of individual
risks and the overall riskiness of the project. At this stage the potential damage
should be determined. Methods for the quantitative risk analysis include statistical
analysis, scenario building, expert assessments, analytical methods, and the use of
a decision tree and simulation. Each of these methods has certain disadvantages
which can be overcome by using an integrated approach.

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 METHODOLOGY & FINDINGS
Modern methods of calculating the efficiency of the investment project involve
the use of a one-dimensional criterion. The risk situation is taken into account with
the help of the sensitivity analysis. An approach based on the method of multi-
criteria selection with the interval estimation of the riskiness.
An approach based on the calculation of the net present value, discounted payback
period, and internal rate of return for each of the analyzed alternatives. Here we
continue the development of this approach and consider in more detail how to take
into account the risk component of multi-dimensional assessment. We suggest
including in the algorithm the expert forecast of the future market conditions and
risk assessment of each of the possible situations.
Let us assume that an expert survey is conducted and intervals of an assessment of
indicators NPV, IRR, DPP and risk for several investment projects are determined.
We also assume that experts reflected intervals of estimates both in natural units of
indicators, and in points. We can now estimate the efficiency of investment
projects and to choose the most preferable one (indicators of efficiency are
diverse).

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The algorithm of finding the Pareto set under interval preference relation
1. Provide the degree of dominance of alternative 1 above alternative 2 on interval
criterion by interval membership function and determine the ratio of the strong
interval preference.
2. Find the value of the membership function for each pair of variants for each
criterion and build the scoring matrix.
3. Determine coefficients of criteria importance as values of the membership
function of the set of non-dominated alternatives.
4. Choose the best alternatives for individual criteria
5. Create matrix of the pairwise comparison and matrix of preferences.
6. Sequentially select elements of the Pareto set based on the hard ranking scheme.

SUMMARY

The suggested algorithm of the investment project selection is adapted to the

risk situation. The diversity of economic interests in the economic system is taken
into account. The proposed algorithm also provides the possibility to reflect the
uncertainty of the forecast states of the system. This is achieved by describing the
risk situations with multi-component indicator of the risk as one of the criteria for
decision making.
This approach increases the possibility of using the multi-criteria selection
method for a real business environment. The proposed investment project selection
algorithm allows us to take into account the diversity of interests inherent in the
economic system and the uncertainty of the environment in which economic
activity takes place. It is most relevant to complex decision-making by professional
management in a commercial organization.

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1. Suggestions:

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 2. Conclusion:
Based on above study it is concluded that the The investment project selection
algorithm can be recommended for long-term strategic decision-making in
situations of risk.

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 3. References:

Lukicheva L.I., Egorychev D.N. Upravlencheskie resheniya.-M.:Omega-

M, 2006.-523 s. Stoyanova E.S., Krylova T.B. Finansovy menedgment:
teoriya i praktika.-6-e izd.- M.:Perspektiva,2006.-655 s.

Rua B. Problemy i metody resheniy v zadachah so mnogimi celevimy

funkciyamy//Voprosy analiza i prosedury prinyatiya resheniy.-M.:
Mir,1976.-s.20-58

Hohlov N.V. Upravlenie riskom: ucheb.posobie dlya studentov vuzov.-

M.: UNITI-DANA,2001.-239 s.

Syroegin I.M. Sovershenstvovanie sistemy pokazateley eff ectivnosty i

kachestva.- M.:Economica,1980.-192 s

Serguieva A., Hunterb J. Fuzzy interval methods in investment risk

appraisal // Fuzzy Sets and Systems. -2004. - №142. - P. 443–466.

Rodionova E.A.,Epsteim,M.Z.,Petuhov,L.V. Mnogomernaya ocenka

investicionnyh proektov n osnove intervalnyh predpochteniy//Nauchno-
tehnicheskie vedomosty
SPbGPU/Informatika.Telekommunikacii.Upravlenie.-2013.-№2(169).-s.
141–148.

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