Financial and Project Risk Management
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Financial and Project Risk Management

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Questions and Answers

What is a crucial step in achieving financial closure for a project?

  • Limiting contractor involvement
  • Choosing a reliable consultant
  • Mobilizing resources effectively (correct)
  • Conducting market research
  • Which factor is essential to mitigate project construction risk?

  • Minimizing budget allocations
  • Engaging a skilled contractor (correct)
  • Focusing solely on cost reduction
  • Avoiding legal contracts
  • What type of risk is primarily associated with changes in government legislation affecting business?

  • Political Risk (correct)
  • Environmental Risk
  • Market Risk
  • Financial Risk
  • How can environmental risks impacting a project be assessed?

    <p>Through a thorough environmental study</p> Signup and view all the answers

    What is a common challenge faced when financial closure is not achieved?

    <p>Implementation becomes difficult</p> Signup and view all the answers

    What is the best approach to minimize market risk after project commercialization?

    <p>Conducting a comprehensive market study</p> Signup and view all the answers

    Which risk involves potential fluctuations in currency rates impacting business costs?

    <p>Exchange Risk</p> Signup and view all the answers

    What does force majeure refer to in the context of project risks?

    <p>Natural disasters beyond control</p> Signup and view all the answers

    What does PEST analysis primarily focus on?

    <p>External environmental factors</p> Signup and view all the answers

    In Porter's Five Forces, which factor relates to the ability of suppliers to affect pricing and quality?

    <p>Bargaining power of suppliers</p> Signup and view all the answers

    What is the main difference between accounting profit and cash flow in capital investment assessment?

    <p>Cash flow accounts for actual cash transactions, while accounting profit can include theoretical revenue.</p> Signup and view all the answers

    How does assessing investment project risks benefit an organization?

    <p>It enhances predictive capabilities and long-term planning.</p> Signup and view all the answers

    What does suitable resource utilization imply in the context of project management?

    <p>Efficiently aligning resources with project goals.</p> Signup and view all the answers

    What potential risk can arise when subcontracting part of a project?

    <p>Loss of control over quality and deadlines.</p> Signup and view all the answers

    Which of the following describes a challenge during the financial closure phase of a project?

    <p>Ensuring cash flow is aligned with project milestones.</p> Signup and view all the answers

    Which of the following methods can be used to assess environmental risks in a project?

    <p>PEST analysis and Porter's Five Forces.</p> Signup and view all the answers

    Why are cash flows considered to be a better measure of economic viability than accounting profit?

    <p>Cash flows reflect actual cash movements, providing a clearer picture of financial health.</p> Signup and view all the answers

    What should be done with depreciation when calculating relevant cash flows for investment projects?

    <p>Depreciation should be added back to profit after tax.</p> Signup and view all the answers

    How should net changes in working capital related to major investments be treated?

    <p>They should be included as part of relevant cash flows.</p> Signup and view all the answers

    Which of the following statements regarding overhead in capital projects is correct?

    <p>The impact of capital projects on overhead should be assessed for relevance.</p> Signup and view all the answers

    How should financing costs for a capital project be considered?

    <p>They should be included within the discount rate.</p> Signup and view all the answers

    What role do sunk costs play in the evaluation of new investment projects?

    <p>Sunk costs should be ignored since they are already incurred.</p> Signup and view all the answers

    What is the significance of assessing environmental risks in investment projects?

    <p>Ignoring environmental risks can lead to long-term financial liabilities.</p> Signup and view all the answers

    Which of the following best describes the relationship between investment project risks and financial closure challenges?

    <p>High project risks can complicate and delay financial closure.</p> Signup and view all the answers

    Study Notes

    Financial Closure Risk

    • Once a decision is made to proceed with a project, resources need to be mobilized for investment.
    • Achieving financial closure is crucial for project implementation, especially for large investments.

    Project Construction Risk

    • Technical knowledge problems can be solved by collaboration with experienced EPC contractors.
    • Contract terms should include provisions for liquidated damages in case of delays.
    • Ethical and safety standards need to be imposed on contractors.

    Political Risk

    • Political decisions in the host country can negatively affect multinational profits and goals.
    • Adverse political action can range from detrimental to financial, such as laws restricting capital movement.

    Market Risk

    • After commercialization, a project might find that its products lack a market or have lower demand or selling price than anticipated.
    • Engaging a good firm for market studies can minimize this risk.

    Policy Risk

    • Tax policies and incentive schemes are subject to change with government changes.
    • Policies on FDI limits, permitted sectors for private companies, and import tariffs also change.
    • Sensitivity analyses should be conducted for every project to assess potential policy impacts.

    Exchange Risk

    • Fluctuations in exchange rates can negatively impact businesses, affecting import/export costs or foreign currency loan repayments.

    Environmental Risk

    • The role of environmental considerations in commercial decisions and litigation is increasing.
    • Companies should thoroughly study environmental risks inherent to their projects.

    Force Majeure (Superior force or Act of GOD)

    • Unexpected events beyond any party's control, such as earthquakes or cyclones, can disrupt projects.

    Why Cash Flows are a Better Measure of Economic Viability

    • Cash flow reflects the actual cash generated and spent by a business, unlike accounting profit which includes non-cash items like depreciation.

    Identifying and Calculating Relevant Cash Flows for Investment Projects

    • Depreciation: Depreciation is added back to profit after tax to arrive at cash flows.
    • Working capital: Increases in working capital, often required for new production facilities, should be considered in calculating cash flows.
    • Overhead: The impact of capital projects on overhead costs needs to be assessed to determine relevance.
    • Financing cost: Financing costs are best accounted for within the discount rate.
    • Sunk cost: Sunk costs are ignored as they are already incurred.

    Environmental Analysis - PEST Analysis

    • Political: Factors such as government stability, policies, and regulations.
    • Social: Factors such as demographics, cultural trends, and consumer preferences.
    • Economic: Factors such as economic growth, inflation, and interest rates.
    • Technological: Factors such as technological advancements and innovation.

    Environmental Analysis - Porter's Five Forces

    • Potential new entrants: Barriers to entry and the threat of new competitors.
    • Bargaining power of suppliers: The influence of suppliers on pricing and availability.
    • Bargaining power of buyers: The influence of customers on pricing and product specifications.
    • Competitive rivalry: The intensity of competition among existing players.
    • Threat of substitutes: The availability of alternative products or services.

    Alternatives in Assessing Capital Investment Proposals

    • Accounting profit: Assesses profitability based on revenues and expenses recorded in accounting.
    • Cash flow: Considers the actual cash generated and spent, incorporating the timing of cash flows through discounting techniques.

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    Description

    Explore the various risks associated with financial closure, project construction, political influences, market fluctuations, and policy changes that can affect project implementation. This quiz covers essential concepts and strategies for mitigating these risks in large investment projects.

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