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