Cost of Capital and Risk Evaluation

Cost of Capital and Risk Evaluation

Define and Measurement of Risks in Financial Projects

Financial risk is the fear of losing money by the government or financial institutions by issuing loans to creditors having big debts or who may be unable to repay the money back on time. Some of the methods employed in measuring risks in financial projects include access to the credit history of the creditor, number of accounts the creditor has, customer’s cash flow and number of creditor’s competitors (Project Finance, 2010).

Examples of Uses for Sensitivity Analysis

Sensitivity analysis and what-if scenarios examine the effect on a company’s gross income when the level of sales raises or lowers.  According to Counting Research Database (2013), sensitivity analysis and what-if scenarios answer the question what would happen with gross income if the level of sales increases or decreases. For example, what would happen to gross income of a certain company if its sales increase by 20% from the original sales?

Fixed and Variable Cost

Project Finance (2010) outline that fixed costs are the elements that do not depend on the output since they remain constant throughout, that is whether the output changes or not. Examples are rent, machinery and buildings. Variable costs varies with output and increase at a constant rate relative to labour and capital. Examples include labour cost, raw materials and packaging.

Examples of the Different Types of Costs in Various Applications

Counting Research Database (2013) elaborates that other examples of different type of costs include direct cost, associated with materials, labour and transportation of products. Operational cost deals with applications such as storing and maintenance. The cost may be fixed or variable. Minimising variations in activities can help avoid Incremental costs resulting to change in running a business (Project Finance, 2010).

References

Counting Research Database (RLE Accounting). (2013). doi: 10. 4324/9781315867182

Project Finance. (2010). Encyclopaedia of Finance, 218-219. Doi: 10.1007/0-387-26336-Ac

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