Factor Affecting Risk in Capital Budgeting

1. Possible inaccuracy of the figures used in the evaluation.

 Capital budgeting involves forecasting the possible projects that can
increase the value of a company. This could be done through the
operation department that involves new machineries for the production
of goods, and even expanding the product line of a business.

 (MCDONALDS)
 Capital is the cash obtained through some form of financing. The two
primary ways that companies finance operations are with debt and
equity. Depending on the nature of the business, some companies may
require more debt than equity, or vice versa.

 Capital is a critical component of growing business operations. It is what

keeps everything flowing., raising capital isn’t just for companies going
through hard times. Capital is also required by successful companies
looking to grow. Companies also use debt to buy back stock or pay
dividends.

 (Pinkasovitch, 2021).
 If this is the case, inaccuracy in estimating the cash figures or expenses
used in the project could lead to disastrous Return of Investment (ROI).
This case happened in Converse back in 1995. Aside from the fact that
the company was facing competition with well-known brands like Nike
and Adidas, their investment in an apparel company which is Apex One
failed, causing them to fell in debt. Figures associated with the
investment were miscalculated along with the external factors of
competition. But this was solved through changing of Management
Team after a private firm, Perseus, bought Converse back in 2001. They
also closed their US and Mexico factories and deepened their
relationships with retailers for an increase in shelf space (CBInsights,
2019).
  In this scenario, we can observe that it is inevitable to give up something
to be able to gain new things. If the new owner of Converse, which is
Perseus, didn't do those things, our generation might not know and
experience the good quality brought by these sneakers company. These
are the several solution in this kind of risk; Increase the required rate of
return discount factor for your project's cash flows, reduce future cash
flows by an estimated loss percentage and reduce all delay cash flow
payments by year.
2. Type of business involved.
 It refers to which business are you starting to open that can fit to your
budget in starting. Businesses should start in a small that expands
eventually. There are many types of business which is sole
proprietorship, partnership, and corporation wherein you can get
investment to start your business.
 Viyline cosmetic started in small were Viy Cortez is the one who is
managing her business. She has only 10,000 capital budget. She was the
one who packages the product and manages the messages and orders.
Through her vlogging her business grow and the costumer increases.
But now she has almost a hundred of staff and also she has a lot of
business other than cosmetics.
3. Type of physical plant and equipment involved.
 Refers to the necessary infrastructure used in the support and
maintenance of a given facility. The business should be in the good place
where consumers can recognize it easily. The storage can be placed to
anywhere so that if you are able to move into another place/location.
Equipment that in a good condition can still be improve and can be
useful in future purposes that business owners don’t need to buy a new
equipment. Business owners buys expensive equipment, because if it is
expensive it can be used for a long time.
 Driptea encounters shortage in equipment because the consumers
increase. They bought extra equipment that can still be use in the future.
This business is still working on progress. It has a lot of branches in
different places in Laguna, and still expanding.
4. Length of time that must pass before all the conditions of the evaluation
become fulfilled.
 The business of Rice seller during the rainy season have experiencing
the severe shortage of production of rice that needs to be sold. As a
result of typhoon, it damaging the agricultural sector that decreased the
rice production yield. And that’s one of a rice seller and farmers issues.

When I asked my mother on what is the solution would be for rice

sellers once there is a rice scarcity because of typhoon, she said that the
government policy and some business owners will import to the other
country, and after that they distributed the products to the retailers of
rice.

 When I had experience an e-loading business, this small business taught

me to be patient. Due to the fact that an e-loading, You don't make
money every day, you rarely have customers depending on them if they
load. But that wasn't a reason for me to give up. I still continued even
though it was only 5 pesos I earn every time someone loads. Because of
the 5 pesos I saved, I was able to use online shop like shopee and order
some stuffs that make me happy.