RISK MANAGEMENT

RISK-
•Risk can be defined as the variability of return
from an investment
1
•It is an event that has some degree of
uncertainty attached
•If the probabilities of deviations are known then
it is known as risk but if probabilities are not
known then it should be uncertainty.
 RISK MANAGEMENT

It is usually of two types-

•Positive risk: offers benefit to project
•Negative risk: Creates a loss to project
2 •The purpose for planning for risk is thus
twofold-
•To take advantage of positive risk
•To reduce the impact of negative risk
•Risk Management is the process of proactive
planning for events that may occur during the
life of a project
 RISK MANAGEMENT

•Since project appraisal is based on certain

assumptions hence there in always possibility
of variations and risk of yielding results which
3 may deviate from reality.
 SYSTEMATIC RISK

• It is due to external factors on an organization.

Which are normally uncontrollable
• It is a macro in nature as it affects a large
number of organizations operating under a
similar stream or same domain.
• It influences a large number of assets.
 Unsystematic Risk

• Unsystematic risk is due to the influence of

internal factors prevailing within an organization.
Such factors are normally controllable from an
organization's point of view.
• It is a micro in nature as it affects only a
particular organization. It can be planned, so that
necessary actions can be taken by the
organization to mitigate them.
 TYPES OF RISK

1. Project Completion risk

2. Resource risk
3. Technology risk
4. Exchange rate risk
5. Political risk
6. Legal risk
 TEHNIQUES OF RISK ANALYSIS

• Though there are many mathematical techniques but

following are simple tools for analyzing small and
medium size projects-
• Sensitivity analysis
• Scenario analysis
• Monte Carlo Analysis ( simulation Analysis)
• Break Even Analysis
• Decision tree
SENSITIVITY ANALYSIS- (WHAT ‘IF’ ANALYSIS)

• If sales or investments deviate from expected value

than this analysis is done.
• It indicates the vulnerability of a project
• NPV or any other financial indicator is analysed for
variability due to change in any one variable at a
time keeping other factors constant.
• The pessimistic ,optimistic and expected forecast are
made for NPV or other indicators. Based on change
in a variable the change in NPV is computed.
SENSITIVITY ANALYSIS- (WHAT ‘IF’ ANALYSIS)

• SHORTCOMINGS- It shows change in NPV due

to change in only one variable which is not a
real case because several variables change at a
time.
 Scenario Analysis

• In Scenario analysis several variables are varied

simultaneously following three scenarios are
considered
– Optimistic scenario
– Pessimistic scenario
– Most Likely scenario
• Note- This method is an improvement over
sensitivity analysis because it considers variation in
several variables together which is more realistic.
Monte Carlo Method (Simulation Analysis)

• The decision maker would like to know the

impact of several variables which affect the
project.
• Steps Involved-
a) The modeling of the project will be done
to find how NPV is related to other
parameters i.e. exogenous variables
b) Specified value of parameters and
probability distribution of each
exogenous variable.
 Monte Carlo Method (Simulation Analysis)

c) Select the value at random from the probability distribution

of each exogenous variable
d) Determine NPV corresponding to randomly generated
values of exogenous variables
e)Repeat step 3 and 4 a number of times to get a large
number of simulated NPV.
f)Plot the frequency distribution of NPV, which may be
of any of the following type-
 
 
 BREAK EVEN ANALYSIS-

• The total costs consists of – Fixed and variable

cost
– Fixed cost- Remains constant irrespective of
the change in the volume or the quantity of
the output.
– Variable cost- It vary directly with the
volume or quantity of output because raw
material cost is variable.
 BREAK EVEN ANALYSIS

• The revenue/sales realization is directly

proportional to the quantity or volume of
product.

Total cost= Fixed cost+ variable cost ( V.C.)

 CONTRIBUTION
• Difference between the sales realization and
the variable cost. It contributes towards fixed
cost and profit.
• At break even point ,sales realization
(revenue) is equal to fixed cost+ variable cost
• Break even no=Fixed price/Selling price per
unit- VC per unit
• Break no number= FC/Contribution per unit
 RISK MANAGEMENT PLAN
• Prepared by project manager
• Highlights identification of risks
• Possible impacts /outcomes of risks
• Potential Actions/Precautions to be taken
RISK ASSESSMENT MATRIX
RISK ASSESSMENT MATRIX