Risk Management

A. Explain, giving reasons, whether or not the above statement is true.

That a positive net present value of risk management cash flows discounted at a suitable risk adjusted interest rate will add value to a risk management decision is generally true. There are, however, significant assumptions implicit in the statement. These assumptions are that: (1) all risk management cash flows will be identified; (2) all risk management cash flows will be accurately measured and projected; (3) the discount rate selected will accurately reflect actual conditions; and (4) the question of timing will be dealt with effectively.

Present value analysis is predicated on an assumption that funds in hand today are worth more than money which will be in hand at some future point in time, and on an assumption that the more distant is the future holding of funds, the less will be the present value of those funds (Gitman, Joehnk, and Pinches, 1990, p. 183). Consistent with these two assumptions the amount of funds expected to be held at a future point in time is discounted at a rate of interest at which the funds could be invested today, if they were held today. It should be noted that a variety of interest rates are typically available at a given time, and that risk factors must be considered in the

. . .
widely used in capital budgeting. One deficiency of this procedure, however, is the neglect of the issue of timing with respect to project implementation in an uncertain environment (Lee, 1988, p. 155). The timing option, however, is not costfree. Significant resources may have to be committed in order to gain access to the timing option. The cost of waiting is the discrete cash flow at the time point which creates a wedge between the present value of a project which has been implemented before the time point, and the present value of a project not yet implemented (Lee, 1988, p. 166). Models are available to the manager, that derive the value of the timing option, and a triggerpoint value. Whenever the value of a project is greater than the triggerpoint value, the project should be implemented immediately. B. Provide a classification of the main risk management cash flows and explain how they may be estimated for discounting purposes. Capital budgeting cash flows may be classified with respect to risk in a number of different ways. One such classification system that is widely used is as follows (Gitman, Joehnk, and Pinches, 1990, p. 573; Pappas and Brigham, 1991, pp. 362363): 1. Replacem
. . .

Some common words found in the essay are:
Joehnk Pinches, Pappas Brigham, O'Brien Wakeman, United Treasury, Doherty Explain, Finance Accounting, Financial Management, Miscellaneous Investment, , Engineering Economics, capital budgeting, cost capital, risk management, gitman joehnk pinches, gitman joehnk, cost risk, discount rate, joehnk pinches, pinches 1990, joehnk pinches 1990, cash flows, cash flow, management cash flows, decision tree analysis, risk management cash,
Approximate Word count = 3080
Approximate Pages = 12 (250 words per page)

More Essays on Risk Management