“DISCUSS THE TECHNIQUES OF PROJECT RISK ANALYSIS IN

DETAILS WITH ILLUSTRATIVE EXAMPLES ALSO LIST OUT THE

MERITS AND DEMERITS OF THESE TECHNIQUES”

SUBMITTED TO:
DR. BHARGAV PANDYA

Presented By
NAME : VADHAVI JIGAR P.
Roll No.: 64 MBA Batch (2017-19)

M.S. PATEL INSTITUTE OF MANAGEMENT STUDIES

FACULTY OF MANAGEMEN STUDIES

The Maharaja Sayajirao University Of Baroda

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 Brief Overview
The risk varies according to the nature of investments. A research and
development project can be much riskier than the expansion project
while; the expansion project can be much riskier than the replacement
project. Hence, the firm must evaluate the risk before employing its
resources in any long-term investment project.

 The firms apply several techniques to handle the risk associated with the
capital budgeting decisions and are grouped into two broad categories:

1. An approach to handling stand-alone risk of a project

2. An approach to handling the risk associated with the firm and with the market
(Contextual Risk)

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 1. SENSTIVITY ANALYSIS :-
 A sensitivity analysis determines how different values of an independent variable
affect a particular dependent variable under a given set of assumptions. This
technique is used within specific boundaries that depend on one or more input
variables.
 Sensitivity analysis can be used to help make predictions in the share prices of
public companies. Some of the variables that affect stock prices include company
earnings, the number of shares outstanding, the debt-to-equity ratios (D/E), and the
number of competitors in the industry. The analysis can be refined about future
stock prices by making different assumptions or adding different variables. This
model can also be used to determine the effect that changes in interest rates have on
bond prices. In this case, the interest rates are the independent variable, while bond
prices are the dependent variable.

MERITS :-

 It shows how robust or vulnerable a project is to changes in values of the underlying variables
 Help in decision making
 Helps in identifying how dependent the output is on a particular input value. Analyses if the
dependency in turn helps in assessing the risk associated
 Aids searching for errors in the model

DEMERITS
 It merely shows what happens to NPV when there is a change in some variable, without
providing any idea of how likely that change will be.
 Typically, in sensitivity analysis only one variable is changed at a time.
 The interpretation of result is subjective.

Example:-

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 2. SCENARIO ANALYSIS :-
 Scenario analysis is conducted, to analyze the impacts of possible future
events on the system performance by taking into account several alternative
outcomes, i.e., scenarios, and to present different options for future
development paths resulting in varying outcomes and corresponding
implications.
 Scenario analysis is the process of forecasting the expected value of a
performance indicator, given a time period, occurrence of different
situations, and related changes in the values of system parameters under an
uncertain environment. Scenario analysis can be used to estimate the
behavior of the system in response to an unexpected event, and may be
utilized to explore the changes in system performance, in a theoretical best-
case (optimistic) or worst-case (pessimistic) scenario

MERITS:-
 helps you understand the possible implications and benefits of different approaches
 Having all the potential outcomes laid out in front of you can help you make the best decision

DEMERITS:-
 It is based on the assumption that there are few well-delineated scenarios.
 The main drawback of this method lies in the interpretation of its results: how do you decide
which scenario is preferable? In addition, the two parameters (uncertainty and impact) can be
highly subjective and very difficult to measure
 This analysis Expands the concept of estimating the expected values.

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 3. BREAK-EVEN ANALYSIS :-
 Break-even analysis is a technique widely used by production
management and management accountants. It is based on
categorising production costs between those which are "variable"
(costs that change when the production output changes) and those
that are "fixed" (costs not directly related to the volume of
production).
 Total variable and fixed costs are compared with sales revenue in
order to determine the level of sales volume, sales value or production
at which the business makes neither a profit nor a loss (the "break-
even point").
The Break-Even Chart:- In its simplest form, the break-even chart is a graphical representation of
costs at various levels of activity shown on the same chart as the variation of income (or sales,
revenue) with the same variation in activity. The point at which neither profit nor loss is made is
known as the "break-even point" and is represented on the chart below by the intersection of the
two lines:

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