Podcast Beta
Questions and Answers
What is a crucial step in achieving financial closure for a project?
Which factor is essential to mitigate project construction risk?
What type of risk is primarily associated with changes in government legislation affecting business?
How can environmental risks impacting a project be assessed?
Signup and view all the answers
What is a common challenge faced when financial closure is not achieved?
Signup and view all the answers
What is the best approach to minimize market risk after project commercialization?
Signup and view all the answers
Which risk involves potential fluctuations in currency rates impacting business costs?
Signup and view all the answers
What does force majeure refer to in the context of project risks?
Signup and view all the answers
What does PEST analysis primarily focus on?
Signup and view all the answers
In Porter's Five Forces, which factor relates to the ability of suppliers to affect pricing and quality?
Signup and view all the answers
What is the main difference between accounting profit and cash flow in capital investment assessment?
Signup and view all the answers
How does assessing investment project risks benefit an organization?
Signup and view all the answers
What does suitable resource utilization imply in the context of project management?
Signup and view all the answers
What potential risk can arise when subcontracting part of a project?
Signup and view all the answers
Which of the following describes a challenge during the financial closure phase of a project?
Signup and view all the answers
Which of the following methods can be used to assess environmental risks in a project?
Signup and view all the answers
Why are cash flows considered to be a better measure of economic viability than accounting profit?
Signup and view all the answers
What should be done with depreciation when calculating relevant cash flows for investment projects?
Signup and view all the answers
How should net changes in working capital related to major investments be treated?
Signup and view all the answers
Which of the following statements regarding overhead in capital projects is correct?
Signup and view all the answers
How should financing costs for a capital project be considered?
Signup and view all the answers
What role do sunk costs play in the evaluation of new investment projects?
Signup and view all the answers
What is the significance of assessing environmental risks in investment projects?
Signup and view all the answers
Which of the following best describes the relationship between investment project risks and financial closure challenges?
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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
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.
