15.2: Introduction to Risk and Capital Budgeting
What you’ll learn to do: Describe different ways to identify and measure potential risk of investments
There are risks in all investments. When we invest in a capital improvement, piece of equipment or project there are many ways it may not work out in the way we thought it might! Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called “risks.”
A variety of risks exist in any capital budgeting process; thus, risk analysis is incredibly important when companies make capital budgeting decisions.