Discuss the reason why capital investment projects should be evaluated for risk
ID: 2807214 • Letter: D
Question
Discuss the reason why capital investment projects should be evaluated for risk in the present, and how risk might be involved in future planning and/or forecasting. Pick a “typical” healthcare project to evaluate and consider the risk factors involved in the situation. How could you determine what is most important and might be the most critical sources of risk? Based on what you find, how would management mitigate those risks? Discuss the reason why capital investment projects should be evaluated for risk in the present, and how risk might be involved in future planning and/or forecasting. Pick a “typical” healthcare project to evaluate and consider the risk factors involved in the situation. How could you determine what is most important and might be the most critical sources of risk? Based on what you find, how would management mitigate those risks?Explanation / Answer
Capital investment projects involve lots of risks because we are putting our capital on the line and it can get wiped out. There are lots of forecasts which don't pan out the way we planned. This can lead to a decrease in the value of our investment due to low returns.
One healthcare project can be providing cancer care in sub Saharan Africa. Sub Saharan Africa has very little healthcare, so they have much cancer and this can be alleviated through good projects.
The most critical source of risk in this case would be the geopolitical risk. It is a volatile region with multiple competing militias. So there is no political stability. The country risk is very huge and your entire capital can be wiped out in one shot. Management can mitigate those risks by buying put options on the stock markets of those countries. In case the country risk materializes, the stock markets crash and we profit from the puts, compensating for the loss of investment.
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