Techniques to manage risk when undertaking investment appraisals

Investment risk management techniques are essential approval methods that help evaluate the
uncertainties associated with investment decisions. A project may fail to succeed because the
management needs to incorporate risks into its investment appraisal process. Some may also fail
because the management needs to understand the signals coming from the risk assessment tools.
Therefore, this section of the report highlights some possible techniques to manage the risk that the
Kitchen Appliances directors can focus on while evaluating the company's investment appraisal.

The company directors should consider using expected value and decision tree tools. These are two
investment appraisal risk management tools that company managers who are indifferent to risks always
use. The technique uses probability to weigh the possible outcomes of various events. The objective is to
make straightforward the effects of natural seasonal factors. The method of expected values and
decision trees have existed for an extended period and have been used in various degrees. The primary
idea behind this strategy is that the long-run averages of the various repetitive occurrences are pulled
together. The company directors should avoid being unaware, although several financial decisions are
made depending on risk management techniques such as the expected values and decision tree.

Another risk management technique that the Kitchen Appliances directors should consider is Maximax.
This technique aims to go all out and maximize any possible returns without considering the substantial
implications of any adverse effect. The managers considering this technique have a massive appetite for
risk, and many entrepreneurs are always within this class. The organization's directors are required in
this technique to select an alternative that maximizes the high possible outcome. Therefore, a payoff
table will outline the potential effects of the choices made under different scenarios.

The Maximin technique is the opposite of the maximax method of decision rule. The rule here is
selecting the option that maximizes the payoff among the list of minimum alternatives available. The
company manager will assemble the most adverse outcome and choose the best of the worst. Many
management theorists call this technique of investment technique a pessimist approach. Managers that
favor this approach are risk averse, expecting the worst and taking precautions to prepare for it.
Another technique is the maximax regret. It is a method that seeks to minimize the time lost if the
wrong option is made. Like the expected value decision-making criteria, this technique appeals to
persons unconcerned with risk.

In its most basic form, sensitivity analysis is a calculated 'what if analysis’. It is a question-and-response
session involving number manipulation. Finding the impacts of operational costs increase on the net
present value of a project is a typical use of sensitivity analysis in investment appraisal. One of the most
generally used risk analysis tools is sensitivity analysis, which attempts to quantify the degree of change
in variables and underlying assumptions that might influence the bottom line of a project's cash flow
and profitability. The purpose of evaluating a project before committing resources to it is to provide
managers with a larger picture of what value the project would offer to the organization's overall
performance.