International Journal of Applied Finance For Non-Financial Managers (ISSN: 1742-528X) Volume 1 Issue 2
Royal Holloway, University of London
Many of the more theoretical risk assessment techniques used to evaluate capital projects have been adapted from those developed specifically for the financial markets. Some of these theories, while highly suitable for the financial markets, might, however, be inappropriate for use by organisations considering the investment in physical assets. Adopting a financial theory approach to DCF calculations, by using risk adjusted discount rates, is, in effect, treating internal assets as though they were ‘securities’ rather than part of the ultimate value generating fabric of the organisation. Such techniques do not allow management the opportunity to ‘manage’ project specific risk, as they do not attempt to identify a project’s specific risks. Financial models deal with ‘statistics’ but managers need to go beyond the statistics to have a greater understanding of the ‘actual’ specific risks they face. It is therefore important that a logical approach to risk evaluation is taken by identifying and evaluating a project’s key risk elements. A risk management process, aimed at the project definition stage, has been developed called the project risk profile model, which is designed to take on a more pragmatic approach to the assessment of project specific risk.