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3922 Words May 31st, 2014 16 Pages
Question 1: Consider the arguments of John McPhee and Tony Hughes regarding how the risk of these two projects should be measured and incorporated into the investment evaluation process. Are both of them technically correct in the methods they suggest to account for project risk, and which method of risk-adjustment do you think should be applied in evaluating the feasibility of these two projects?

As defined by Mira and Dunja, 2005, risk can be determined as knowing future event probability, and uncertainty as unknown probability of future events. Measured uncertainty is a risk. Term risk and uncertainty are often used as synonyms in economy because there is no possibility in economy of some event repetition in exactly the same
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Influence of new investment project addition on total risk and returns change depends on many factors, among them the most important are: (1) correlation of new investment with average market return and risk and (2) new investment relation to other enterprise investment projects.

Based on Eva and Mika, 2004, the most common method in their research for how companies measure their project’s risk is to use some kind of sensitivity analysis, some kind of rule of thumb and Net Present Value (NPV). So, based on their research we can conclude that the best way to measure the risk of these two projects by NPV. NPV method (also known as discounted cash flow method) is the present value of net cash inflows generated by a project including salvage value, if any, less the initial investment on the project. In the investment project, NPV as the base to accept or reject a proposed investment in projects like purchase of new equipment, purchase of inventory, expansion or addition of existing plant assets and the installation of new plants. This case study has mentioned the projected salvage value for the strip mining operation would be $600, 000 at project end, while the equipment for the underground plant could be expected to have a residual value of $150, 000. So, based on this information we can

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