Evaluating Projects & Risk: Investment Decisions & Management

This assignment provides a solution to a financial risk management problem involving the selection of one project out of two (Project X and Project Y) based on Net Present Value (NPV) analysis. Project X, with a 10% ROI, yields a positive NPV of $4,763.34, while Project Y, with a 12% ROI, results in a neg...Read More

RISK MANAGEMENT
ASSIGNMENT
STUDENT ID/ NAME
[Pick the date]

Question 3
In order to determine the superior project choice from the given options, it is imperative to
determine the NPV of the two projects and then compare the same.
Project X
Expected ROI = 10%
Hence, based on the given information, NPV = -10000 + 5000/1.1 + 6000/1.12 + 7000/1.13= $
4,763.34
Project Y
Expected ROI = 12%
Hence, based on the given information, NPV = -15000 + 4000/1.12 + 6000/1.122 +
8000/1.123= -$ 951.17
Conclusion
It is apparent from the above discussion and computation that Project X has a positive NPV
while project Y has a negative NPV. Hence, Project X would be accepted while Project Y
would be rejected (Hubber 80).
Question 4
1) The compound interest would offer a better investment plan since the actual returns
offered would be comparatively higher in case of compound interest as compared to
simple interest. This is because the absolute returns in case of compound interest based
investment plan would keep on increasing on an yearly basis which would not be true for
a simple interest based investment plan which would offer the same amount of returns
every year (Duc and Schoderet 421).
2) The risk management process has the following steps.

 Identify the risk –The first step is to identify the underlying risk through critical analysis
of the underlying business operation. This step is critical since only once a risk is
identified can it be managed. A risk which fails to be identified cannot be managed.
 Analyse the risk – Once the risk has been identified, it is critical to analyse the same in
some detail so as to have an enhanced understanding of the same. This is imperative in
order to understand the nature of the risk, extent of potential damage it can cause and the
mitigation measures in later steps (Allen 175).
 Rank the risk – Since there are various business risks, it is essential to rank the risk in
accordance to the overall impact which would eventually determine the underlying priority
which is of significance.
 Treat the risk – In wake of a given risk, it is imperative that suitable measures need to be
taken so as to manage the risk. It is pivotal to note that all the risks cannot be completely
mitigated and the objective is to manage these with higher focus on the higher ranked risks
as resources need to be deployed for risk management (Hubber 80).
 Monitoring and risk reviewing – Once the requisite measure to manage a given risk is in
place, it is pivotal that monitoring and reviewing ought to be carried out so as to identify
any potential step that needs to be taken incrementally for management of risk (Duc and
Schoderet 487).
3) Market risk refers to the overall risk that the investor is exposed to owing to financial
market performance. This is also called as systematic risk. An example of this would be in
the form of stock market investment which does not correspond to a particular sector
(Allen 126).
Liquidity risk in terms of a business refers to the short term cash shortages which may lead to
difficulties or failure to meet short term liabilities. This would arise when the current assets
are insufficient to meet the outstanding current liabilities (Hubber 187).

References
Allen, Steve. Financial Risk Management: A Practitioner’s Guide to Managing Market and
Credit Risk. New York: John Wiley & Sons, 2016.
Duc, Francois and Schorderet, Yann. Market Risk Management for Hedge Funds.
Foundations of the Style and Implicit Value-at-Risk. New York: John Wiley & Sons, 2015.
Hubbert, Simon. Essential Mathematics for Market Risk Management. New York: John
Wiley & Sons, 2016.