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Risk and uncertainty in capital budgeting


Capital budgeting requires the projection of cash inflow and outflow of the future. The future in always uncertain, estimate of demand, production, selling price, cost etc., cannot be exact.

For example: The product at any time it become obsolete therefore, the future in unexpected. The following methods for considering the accounting of risk in capital budgeting.

Various evaluation methods are used for risk and uncertainty in capital budgeting are as follows:

[Post Image Courtesy of Holohololand at FreeDigitalPhotos.net]

(i) Risk-adjusted cut off rate (or method of varying discount rate)

(ii) Certainly equivalent method.

(iii) Sensitivity technique.

(iv) Probability technique

(v) Standard deviation method.

(vi) Co-efficient of variation method.

(vii) Decision tree analysis.

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

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