Project risks

timer Asked: Mar 6th, 2019
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Question Description

  • Describe the three types of project risks and detail the situation in which each type is most relevant when making a capital budgeting decision. Be sure to include the effect of correlation.
  • Compare and contrast cash accounting methodology and accrual accounting methodology in order to illustrate how each works best for different types of companies.

Submission Details:

  • cite your sources in your work and provide references for the citations in APA format.
  • Your assignment should be addressed in an 8- to 10-page document.

Tutor Answer

School: Boston College



Project Risks Assignment
Institutional Affiliation



Project Risks Assignment
Part I

Types of Project Risks
There are three types of risks that are associated with projects. One of such risk is standalone risk, which denotes a project’s total risks (Ehrhardt & Brigham, 2016). It generally ignores
both the investors and companies’ diversifications across different projects. It also assumes that
any given project would usually be operated in isolation, and therefore, disregards any of the
portfolio effects. Additionally, the stand-alone risk is also frequently measured through the levels
of uncertainties in projected profitability. Specifically, the high the amount of such uncertainty,
the higher the risk becomes. Equally, for most of the project, the utilization of coefficient of
variation, also referred to as standard deviation, helps in measuring this type of risk (Ehrhardt &
Brigham, 2016).
The second type of risk is known as corporate risk. In particular, this particular risk refers
to the contribution of any given project into the total riskiness of the business. In other words, the
risk is the standard deviation of the business’s return on equity (ROE). The risk also depends on
several factors, including the projects stand-alone risk as well as the relationship between the
project’s returns on the business’s overall returns. In terms of measurement, this type of project
risk is evaluated based on the business’s beta value (Ehrhardt & Brigham, 2016). The third, and
last, type of project risk is the market risk, which relates to the total riskiness of diversified
The Stand-alone Risk
This risk results from a company’s operating unit or division. It denotes the risks caused
by particular projects or company departments. Specifically, given that a firm ceases its



operations, then it would mean that stand-alone risks could never occur. A firm’s portfolio
assets, could therefore, be evaluated on a stand-alone basis, especially when the assets in
question are thought to be isolated. In addition, while a portfolio context could take all of the
investments as well as evaluations into account whenever computing the risk, the stand-alone
risk is found by assuming that the assets in question are the only risk as well as value, which the
investor has to lose or achieve (Ehrhardt & Brigham, 2016). Therefore, it should be noted that
the stand-alone risk is used to measure the risks that are related to a company’s single operations
or through holding a particular asset, including a closely held corporation.
The Market Risk
The market risk, usually associated with projects, is the likelihood of an investor
encountering losses resulting from factors that impact on the overall performance of the financial
markets, where the investor is involved. In particular, this type of risk cannot be completely
removed by diversi...

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Good stuff. Would use again.

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