Chapter9ManagingriskManagementAccountingforDecisionMakersTenthEdition
LEARNINGOUTCOMESYoushouldbeableto:IdentifyandevaluatethemostpopularapproachestoriskassessmentfoundinpracticeExplainthenatureofriskandtheimportanceofconsideringriskwhenmakingdecisionsDiscussthepopularityanduseofthevariousapproachestoriskassessmentfoundinpracticeExplainhowtheoutcomesfromassessingriskcanbeused
RiskandinvestmentdecisionsRelativelylongtimescalesareinvolvedLargescalefundsareofteninvolved
MethodsofdealingwithriskininvestmentappraisalScenarioanalysisExpectedvaluesSensitivityanalysisRisk-adjusteddiscountrate
OperatingcostsProjectNPVFinancingcostInitialoutlaySalespriceAnnualsalesvolumeProjectlifeFigure9.1FactorsaffectingthesensitivityofNPVcalculations
Figure9.2ThesensitivityanalysisprocessIdentifythebestestimateforeachinputfactorDerivetheNPV(orotherresult)usingthoseestimatesTakejustonefactorandalteritsvalue,inanegativedirection,untiltheNPV(orotherresult)iszeroRepeatthepreviousstepforeachinputfactorAssessthevulnerabilityoftheprojecttothepossibilitythattheactualvalueforeachinputfactorwillvaryfromitsbestestimateConsiderthelevelofconfidencethatthemoreriskyfactorsmightcausetheprojecttofailMakeadecisiontakingaccountoftheNPV(orotherresult)andperceivedrisk,basedonthesensitivityanalysis
Figure9.3NPVsensitivityanalysisoftheMinadoBarrosolithiumprojectSource:SavannahResourcesplc(2018)ScopingStudyfortheMinadoBarrosoLithiumProjectDeliversNPVofUS$356mSolidBasistoFastTracktheProjecttoaFeasibilityStudy,Figure9,p.23.
Cashflow
(amongstotherssales,EBITDA,
EBIT)17%40%15%Costofcapital(includingsustainablegrowthrate)28%Both,cashflow
andcostofcapitalNosensitivitiesFigure9.4ConsiderationofsensitivitiesSource:AdaptedfromCostofCapitalStudy2018,KPMG,