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new service. .A project simply refers to any investment opportunity which is to be exploited for profit. new organisation. It may consist of a new product. Project is an idea or plan which is intended to be carried out. new business or a new process.

ii.i. It is a risky venture. A project requires team work. . Every project has risk and uncertainty associated with it. It has a fixed set of objectives. v. vi. A project involves investment of money and money·s worth. maturity and decay. iv. It has a life cycle reflected by growth . iii.

Every investment is characterised by return and risk. it refers to the possibility of incurring a loss in a financial transaction. In general. .

Risk arises where there is a possibility of variation between expectations and realizations with regard to an investment.This possibility of variation of the actual return from the expected return is termed risk. Total risk = systematic risk+ unsystematic risk .

The impact of economic. political and social changes is system-wide and that portion of total variability in security returns caused by such system-wide factors is referred to as systematic risk. Systematic risk is further subdivided into  Interest rate risk  Market risk  Purchasing power risk .

The returns from a security may sometimes vary because of certain factors affecting only the company issuing such security. Eg: labour strike. management inefficiency When variability of return occurs because of such firm-specific factors. it is known as unsystematic risk. .

which may result in non-completion of project.Completing the project in time and within the estimated cost itself is a major achievement. . A project that is delayed will result in time over-run which will consequently result in cost over-run. There can be also technology failures.

which will make all profitability estimates wrong. are the resources used by a project.Raw material. fuel. manpower etc.. Shortage of raw material may lead to reduction in capacity utilization and higher cost of production. . power.

ability of competitors to offer their product to customers at a comparatively cheaper price etc. are likely to have an effect. Unforeseen happenings such as Government·s intentions in price fixation. .Price fluctuations of both inputs and outputs affect the project..

the interest on working capital finance increases which will result in lower profit margins than estimated at the time of project appraisal. .Fluctuations in interest may bring in an adverse effect. If the interest rate increases in future.

Rapid growth in technology may make a project obsolete in technology due to the evolution of latest technology.Technology risk may appear in two forms. A project that is based on unproven technology may have hidden defects which may make the project a non-starter. .

controlling foreign exchange transactions. Political risk is a major risk since it cannot be predicted easily. price controls etc. prohibiting export of certain commodities.The Government intervenes in many forms such as levying and regulating taxes. issuing import licenses. regulating monopolistic trade practices. promoting exports. . imposing import duties.

Exchange rate risk also called currency risk. Firms exposed to international economy face this risk. Volatile exchange rates can reduce cost and productivity advantages gained over years of hard work. . When a firm has already committed to a foreign currency denominated transaction. It is the risk arising from currency fluctuations. the firm is exposed to exchange rate risk.