In modern business times, capital budgets play a substantial role to ascertain the long-

term lucrative alternatives for investors’ portfolios. The emergence of unstable global economy

has led the investor or venture capitalist to find less risky investment options (Adams, n.d).

Venture capitalists or investors incorporated a capital budget as a financial analytical tool when

choosing or investing in a portfolio or a project. Moreover, the ultimate aim of every business is

to increase the wealth of investors and minimize the risks or losses. In effect, investment

bankers, managers, and financial analysts capitalized on capital budgeting approaches to

ascertain which of investment portfolio or projects yield the maximum returns over the

investment period (Kenton, 2020).

It is costly to set up a business venture from the crushed. Nevertheless, it becomes crucial

for the business to expand and grow its capital. In view of this, it requires funding, which bring

about financial or investment risk that affect the business as well as investors (Chen, 2019).

The risks related to capital budgeting (Chen, 2019):

 Market Risk

 Operational Risk

 Credit Risk

Market Risk is the uncertainties that occur from market situations. Market situations such

as recessions, political instability, fluctuations in interest rates, natural tragedies, exchange rates,

etc. tend to affect the financial markets, which result in investment losses or erosion of profit. A

natural tragedy like current COVID-19 outbreak is a typical example of market risk where

investors’ wealth or gains were plunges to zero.

Operational Risk encompasses the uncertainties that take place in the course of

performing day-to-day business activities. Business operation risk may result from internal
factors like a bottleneck in production, mismanagement of business’s scarce resources, lack of

job skills, etc. For example, financial malfeasance or misappropriation of company funds by the

CEO can be regarded as operational risk. Since this action can adversely affect the operation or

function of the business.

Credit risk has to do with the uncertainties from failure to meet financial obligations.

Credit facilities such as mortgages, credit cards, loans, etc. from the donor or lender may pose a

high risk when the borrowers fail to repay back the loan. To determine the credit risk, the lender

takes into account the borrower’s willingness to repay back the loan. Borrowers’

creditworthiness, credit history, use of collateral security, among others are utilized before the

lender gives out the credit facilities (LaBarre, 2020).

 Reference

Adams, D. (n.d).The Best Ways to Incorporate Risk Into Capital Budgeting .Retrieved from

https://smallbusiness.chron.com/ways-incorporate-risk-capital-budgeting-15317.html

Chen, J. (2019, June 25).Financial Risk. Retrieved from

https://www.investopedia.com/terms/f/financialrisk.asp

Kenton, W. (2020, May 10). Capital Budgeting. Retrieved from

https://www.investopedia.com/terms/c/capitalbudgeting.asp

LaBarre, O. (2020 May 2). Credit Risk. Retrieved from

https://www.investopedia.com/terms/c/creditrisk.asp