Study and analysis of project risk, market risk and firm risk

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This work aimed to study and analysis the various risk associated with different environment. The selected method consists of market risks and operating risks.

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International Journal of Management (IJM) Volume 10, Issue 1, January-February 2019, pp. 94-103, Article ID: IJM_10_01_013 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=10&IType=1 Journal Impact Factor (2019): 9.6780 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication STUDY AND ANALYSIS OF PROJECT RISK, MARKET RISK AND FIRM RISK Dr. Giriraj Kiradoo Associate Professor in MBA, Government Engineering College Bikaner, Bikaner Area, India ABSTRACT This work aimed to study and analysis the various risk associated with different environment. The selected method consists of market risks and operating risks. The approach used in this paper is proved to be practical and useful in the decision-making process of capital budgeting and investment because each value corresponds to a specific risk measures, so that a specific risk component can be managed to an acceptable risk level. Keywords: Project Risk, Market Risk and Firm Risk Cite this Article: Dr. Giriraj Kiradoo, Study and Analysis of Project Risk, Market Risk and Firm Risk, International Journal of Management, 10 (1), 2019, pp. 94-103. http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=10&IType=1 1. INTRODUCTION It is a well-established undeniable fact that each project involves risk. Moreover, it's a observe to incorporate a brief outline of project risks within the project appraisal report. There are sure projects that economic advantages are often quantified whereas, for others, such quantification isn't doable. The firm risk stems from a technological modification in production method, managerial unskillfulness, the availability of raw material, labor issues and changes in consumer preferences. The financial risk considers the distinction between EBIT (Earnings before Interest and Taxes) and EBT (Earnings before Tax) whereas business risk causes the variations between revenue and EBIT. These are ways that and suggests that to scale back the project risks. http://www.iaeme.com/IJM/index.asp 94 editor@iaeme.com
Study and Analysis of Project Risk, Market Risk and Firm Risk Table 1 EBT and EBIT 2. ANALYSIS OF PROJECT RISKS It is the traditional observe to incorporate a brief outline of project risks in every appraisal report. The aim of this chapter is to produce an outline of project risks so as to assist guarantee uniformity and consistency in appraisal reports. • Relates to comes that economic advantages may be quantified and • Deals with comes that such quantification isn't potential. 2.1. Projects with quantified benefits The economic internal rate of return (EIRR) is that the measure most frequently accustomed indicates the economic viability of financed projects. Calculation of the EIRR needs a collection of assumptions concerning the conditions faced by the project that within the judgment of the appraisal mission ar presumably to prevail throughout its life. However, since bank-financed projects ordinarily have an awfully long life, the conditions faced by the project could amendment for a spread of reasons. Sensitivity analysis is, therefore, allotted to work out the results of attainable changes within the values of key variables (costs, yields, and value of inputs and outputs) on the project's EIRR The number of risks facing a project may be massive, and it's neither attainable nor fascinating to spot all attainable risks related to a project. The risks mentioned within the appraisal report should basically be those that entail major economic consequences. These should be known from the sensitivity analysis and represented in descendant order of importance with reference to their impact on the EIRR http://www.iaeme.com/IJM/index.asp 95 editor@iaeme.com
Dr. Giriraj Kiradoo Figure 1 Economic internal rate of return (EIRR) Particular attention should be paid to risks that might considerably cut back the project's EIRR or render the project uneconomic by reducing its EIRR below the chance price of capital. During this context, each of the base-case EIRR and also the sensitivity indicators are relevant. If the base-case EIRR is high, the discussion of project risks should usually embrace risks to that the project is extremely sensitive. For instance, the EIRR of most projects is extremely sensitive to changes in project output, which can successively rely upon a variety of factors. A discussion of the safeguards employed to reduce the risk of the outputs falling considerably below the extent expected should thus be enclosed. For instance, in an irrigation project, excluding the supply of water, the output could rely upon the availability of different inputs, provision of extension services, and the effectiveness of water management by farmer's teams, and accessibility of adequate infrastructure and storage facilities. Measures taken to confirm adequate and timely accessibility of every should be in brief explained Risks are clearly larger in projects that the base-case EIRR is simply marginally above the chance cost of capital. These larger risks are even larger if the EIRR is extremely sensitive to changes in key variables since even a little reduction within the EIRR would render the project unviable. Even once the EIRR is comparatively insensitive to changes in key variables, combos of adverse changes would possibly simply have an effect on the project's viability. Thus, in such cases, the remedial action planned or adopted should be totally explained If the project output is listed internationally, one risk could also be future changes within the value of the output, notably if the share of a project or the country's output is little relative to the global market. In such cases, a review of the world demands and provide forecasts for the nice in question should be enclosed. By their terribly nature, bound kinds of projects like gas and oil exploration involve terribly high risks. For such projects, it's necessary to supplement the sensitivity analysis with a chance analysis. The latter provides a spread of attainable outcomes in terms of a chance distribution and supported that project connected call may be created a lot of showing intelligence. However, the analysis is a lot of advanced and needs a lot of data concerning events touching the project. thanks to the appreciable work due to, chance analysis of risks is typically undertaken just for project carrying a high degree of risk or for giant comes wherever miscalculations could lead on to a significant loss to the economy. For such comes, the nature of the risks concerned and also the measures are taken or counselled to reduce the risks, at the side of the results of the analyses, should be mentioned within the appraisal report. http://www.iaeme.com/IJM/index.asp 96 editor@iaeme.com
Study and Analysis of Project Risk, Market Risk and Firm Risk 2.2. Projects for which benefits are not quantifiable For projects in certain sectors or sub-sectors like education, health, sanitation, and family planning, project benefits can't be quantified and also the risks can't be measured by sensitivity analysis. In such cases, the connection of project risks to the project's objectives should be explained. The eventualities that may impede the conclusion of the objectives should be mentioned in relation to the project price and output, and also in relation to the socio-economic objectives sought-after by the project In such projects, the risks are larger on the profit facet than on the value facet. as an example, in education projects, college buildings and instrumentation are provided to assist accomplish a prescribed annual output of graduates with a certain talent level. However, the supply of the facilities alone might not make sure the achievement of the project objectives. Their achievement might rely additional upon the availability of trained lecturers, provision of spare funds for the recurring expenditures of the institutions, syllabus and admission standards, and motivation of the scholars. While it's unattainable to eliminate all such risks, it's essential to attenuate them. Major risks of this kind should be known and explained together with the remedial measures planned within the section within which project risks are mentioned. The real benefits of this kind of project associated with broad socio-economic goals. For education projects, these might embrace raised financial gain levels for the trainees and the next level of commercial and agriculturally production. For birth prevention comes, the broad goals could also be a raised variety of acceptors and a consequent reduction within the rate of increment. The success of those projects depends not just on the facilities provided, however conjointly on the continuing favorable conditions assumed by the appraisal mission. For such comes, the assumptions created concerning the connection between the facilities provided and also the project's long objectives should be clearly explained. The conditions or facilities necessary however external to the project should even be known, together with relevant assurances received from the govt. For projects like these, this is often one among the foremost necessary aspects to be mentioned within the section managing project risks. 3. MARKET RISK The market risk affects all the projects within the trade and not a selected project. During this section, the construct of market risk has been explained with relevancy factors that are beyond the management of individual corporates. The market risk is more sub-divided into: • Security market risk • Interest rate risk • Purchasing Power Risk 3.1. Security market risk Often we have a tendency to read within the newspaper that the exchange is within the bear hug or within the bull grip. This means that the complete market is taking possession in a specific direction either downward or upward. The economic conditions, political things and also the sociological changes have an effect on the security market. The recession within the economy affects the profit prospect of the business and also the exchange. The 1998 recession experienced by developed and developing countries has affected the stock markets everywhere the globe. The Southeast Asian crisis has affected the exchange worldwide. Their factors are on the far side of the control of the company and also the capitalist. Theycannot be entirely avoided by the capitalist. It drives home the point that the market risk is inevitable. http://www.iaeme.com/IJM/index.asp 97 editor@iaeme.com
Dr. Giriraj Kiradoo Jack Clark Francis has outlined market risk as that portion of the entire variability of a return caused by the alternating forces of bull and bear markets. Once the protection index moves upward haltingly for a major period of your time, it's referred to as a bull market. Within the bull market, the index moves from a low level to the height. A market is simply reverse to the bull market; the index declines not fluently from the height to a market low point known as a trough for a significant amount of your time. Throughout the bull and market, over eighty p.c of the securities’ costs rise or fall together with the exchange indices. The forces that have an effect on the exchange are tangible and intangible events. The tangible events are real events like earthquakes, war, political uncertainty and fall within the price of a currency. Another example that may be cited is that thePokhran blast on might thirteen, 1998, and therefore the fall of BSESensex by 162 points. At hand sanctions, dampened sentiments and FIIs mercantilism of stocks set a bear section. Many examples like fall within the price of rupee and post-budget blue may be cited for triggering the bear section. Intangible events are associated with market scientific discipline. The market scientific discipline is littered with real events. However, reactions to tangible events become overreactions and that they push the market in a specific direction. Consider instance, the Bull Run in 1994 FII’s investment and relaxation policies gave buoyancy to the market. The market scientific discipline was positive. Little investors entered the market and the costs of stocks while not adequate validator basic factors soared up. In 1996, the political turmoil and recession within the economy resulted in the fall of share costs and therefore the little investors lost faith within the market. There was a rush to sell the shares and therefore the stocks that were floated within the primary market weren't received well. Thus, any untoward political or economic event would lead to a fall within the worth of the security which might be further accentuated by the overreactions and therefore the herd-like behavior of the investors. If some financial establishments begin disposing of the stocks, the concern grips in and spread to different investors. This leads to a rush to sell the stocks. The actions of the financial establishments would have a snowballing result. This sort of overreaction affects the market adversely and therefore the costs of the scraps fall below their intrinsic values. This can be on the far side the control of the company 3.2. Interest rate risk Interest rate risk is that the variation within the single period rates of coming back caused by the fluctuations in the market interest rate. Most typically interest rate risk affects the value of bonds, debentures, and stocks. The fluctuations in the interest rates square measure caused by the changes within the government financial policy and also the changes that occur in the interest rates of treasury bills and also the government bonds. The bonds issued by the govt. and quasi-government are thought-about to be risk-free. If higher interest rates are offered, the capitalist would really like to change his investments from private sector bonds to public sector bonds. If the govt. to serve the deficit in the budget floats a replacement loan/bond of a better rate of interest, there would be a precise shift in the funds from low yielding bonds to high yielding bonds and from stocks to bonds. The rise of the fall in the interest rate affects the value of borrowing. Once the decision when rating changes. Most of the stock traders trade the stock exchange with the borrowed funds. the rise in the value of margin affects the profitableness of the traders. This could dampen the spirit of the speculative traders who use the borrowed funds. The autumn in the demand for securities would lead to a fall in the price of the stock index. Interest rates not only have an effect on the security traders however additionally the company bodies who carry their business with borrowed funds. The value of borrowing would increase and an important outflow of profit would occur in the type of interest the capital http://www.iaeme.com/IJM/index.asp 98 editor@iaeme.com
Study and Analysis of Project Risk, Market Risk and Firm Risk borrowed. This could lead to a discount in earnings per share and a subsequent fall in the value of share. 3.3. Purchasing Power Risk Variations within the returns are caused conjointly by the loss of buying power of a currency. Inflation is the reason behind the lost purchasing power. The level of inflation issue proceeds than the rise in capital price. Buying power risk is that the probable loss within the purchasing power of the returns to be received. The increase in value penalizes the returns to the capitalist, and each potential rise in value could be a risk to the capitalist. Inflation is also demand-pull or cost-push inflation. In the demand-pull inflation, the demand for product and services are in more than their provide. At full employment level of factors of production, the economy wouldn't be ready to provide a lot of product in the short run and also the demand for merchandise pushes the worth upward. The availability cannot be redoubled unless there's an enlargement of labour force or machinery for production. The equilibrium between demand and provide is earned at the next price index. The cost-push inflation, because the name itself indicates that the inflation or the increase in value is caused by the rise in the price. The rise in the price of raw material, labor and instrumentation makes the value of production high and ends in the high price index. The producer tries to pass the upper price of production to the consumer. The laborers or the operating force try and create the company to share the rise in the price of living by exacting higher wages. Thus, the value push inflation features a turbinate result on price index 4. FIRM RISK Firm risk is an exclusive associated peculiar to a firm or a trade. The firm risk stems from managerial unskillfulness, technological modification within the production method, the handiness of raw material, changes in consumer preference, and labor issues. The nature and magnitude of the on top of mentioned factors dissent from trade to trade, and company to company. They need to be analyzed individually for every trade and firm. The changes in consumer preference have an effect on consumer products like tv sets, washer, refrigerators, etc. quite they have an effect on the iron and steel industry. Technological changes have an effect on the information technology trade quite that of consumer product trade. Thus, it differs from trade to trade. Financial leverage of the businesses that's the debt-equity portion of the businesses differs from one another. The nature and mode of raising finance and paying back the loans, involve a risk component. Of these factors from the firm risk and contribute some n the entire variability of the comeback. Broadly, firm risk can be classified into • Business risk • Financial risk 4.1. Business risk Business risk is that portion of the firm risk caused by the operational atmosphere of the business. Business risk arises from the lack of a firm to take care of its competitive edge and also the growth or stability of the earnings. A variation that happens in the operational atmosphere is mirrored on the operational financial gain and expected dividends. The variation in the expected operational financial gain indicates the business risk. As an example take ABC and XYZ corporations. In ABC company, operational financial gain may grow the maximum amount as fifteen percent and as low as seven percent. In XYZ Company, the operational financial gain is either twelve percent or nine percent. Once each of the businesses are compared, ABC Company’s business risk is higher due to its high variability in operational http://www.iaeme.com/IJM/index.asp 99 editor@iaeme.com
Dr. Giriraj Kiradoo financial gain compared to XYZ Company. Thus, business risk thinks about the distinction between revenue and earnings before interest and tax. Business risk is divided into external business risk and internal business risk. • Internal Business Risk • External risk 4.1.1. Internal Business Risk Internal business risk is related to the operational potency of the firm. The operational potency differs from company to company. The potency of operation is mirrored on the company’s accomplishment of its pre-set goals and also the fulfillment of the guarantees to its investors. The assorted reasons of internal business risk area unit mentioned below Fluctuations in sales: The sales level has to be maintained. It’s common in business to lose customers shortly attributable to the competition. Loss of customers can cause a loss in operational financial gain. Hence, the corporate has to build a large client base through varied distribution channels. Diversified sales division might facilitate to keep going this downside. Massive company bodies have long chain of marketing. Little corporations usually lack this diversified client base. Research and development (R&D): typically the product might quit fashion or become noncurrent. it's the management, who has to overcome the matter devolution by concentrating on the in-house analysis and development program. For instance, if Maruti Udyog has to survive the competition, it's to stay its analysis and Development section active and introduce consumer familiarized technological changes in the automobile sector. This can be often dispensed by introducing silkiness, seating comfort and break potency in their automobiles. New products have to be created to switch the recent one. Short keen-sighted cutting of R & D budget would scale back the operational potency of any firm Personnel management: The personnel management of the corporate also contributes to the operational potency of the firm. Frequent strikes and lockouts end in loss of production and high fixed capital cost. Labor productivity also would suffer. The risk of labor-management is a gift all told the firms. It’s up to the corporate to resolve the issues at the table level and supply adequate incentives to encourage the rise in labor productivity. The encouragement given to the laborers at the ground level would boost the morale of the labor force and ends up in higher productivity and fewer wastage of raw materials and time Fixed price: The price parts also generate internal risk if the fixed cost is higher in the cost part. Throughout of recession or low demand for a product, the corporate cannot scale back the fixed cost. At the identical time in the booming amount also the fastened issue cannot vary in real-time. Thus, the high fixed cost component in a firm would become a burden to the firm. The fixed cost component has got to be unbroken continuously in a very affordable size, in order that it should not have an effect on the profitableness of the corporate Single product: the interior business risk is higher within the case of a firm manufacturing one product. The autumn in the demand for one product would be fatal for the firm. Further, some products are a lot liable to the trade cycle whereas some products resist and grow against the tide. Hence, the corporate has got to diversify the products if it's to face the competition and also the trade cycle with success. See an instance; Hindustan Lever Ltd. that is manufacturing a large variety of consumer cosmetics is prospering with success in the business. Even in diversification, diversifying the product within the unknown path of the corporate might cause an internal risk. Unwidely diversification is as dangerous as manufacturing one smart http://www.iaeme.com/IJM/index.asp 100 editor@iaeme.com
Study and Analysis of Project Risk, Market Risk and Firm Risk 4.1.2. External risk External risk is that the results of in operation conditions obligatory on the firm by circumstances on the far side of its management. The external environments within which it operates exert some pressure on the firm. The external factors are social and regulative factors, financial and monetary policies of the govt, trade cycle and therefore the general economic atmosphere at intervals that a firm or a business operates. A government policy that favors a specific business might result in an increase within the stock value of the actual business. For example, the Indian sugar and fertilizer business relies abundantly on external factors. The varied external factors are being mentioned below: Social and regulative factors: Harsh regulative climate and legislation against environmental degradation might impair the profitableness of the business. price control, volume control, import/export control and atmosphere control reduce the profitableness of the firm. This risk is additional in industries associated with service sectors like telecom, banking, and transportation. The governments’ tariff policy of the telecom sector encompasses a direct referring to its earnings. Likewise, the interest rates and therefore the directions are given within the disposition policies have an effect on the profitableness of the banks. Calcutta electrical electric Company (CESC) has not been able to increase its power tariff because of the stiff resistance by the West Bengal government. The Pollution panel has asked to shut most of the tanneries in Madras that has affected the leather business Political risk: Political risk arises out of the modification within the government policy. With a modification within the ruling party, the policy additionally changes. When Sri. Manmohan Singh was the minister, relief policy was introduced. Throughout the Bharathiya Janta Party government, albeit efforts are taken to reinforce the foreign investment, additional stress is given to Swadeshi. Political risk arises primarily within the case of foreign investment. The host government might modification its rules and rules concerning foreign investment. From the past, an example may be cited. In 1977, the govt set that the multinationals should dilute their equity and share their growth with the Indian investors. This forced several multinationals to liquidate their holdings within the Indian corporations Business cycle: The fluctuations of the trade cycle cause fluctuations within the earnings of the corporate. Recession within the economy ends up in a drop in the output of the many industries. Steel and white trade goods industries tend to move in tandem with the trade cycle. During the boom period, there would be feverish demand for steel products and white trade goods. However, at constant time, they might be hit abundant throughout the recession period. At present, the information technology business has resisted the trade cycle and rapt counter- cyclically throughout the recession period. The effects of the trade cycle vary from one company to a different. Sometimes, corporations with inadequate capital and consumer base are also forced to shut down. In another case, there is also a fall within the profit and therefore the rate might decline. This risk issue is external to the company bodies and that they might not be able to control it. 4.2. Financial risk It refers to the variability of the financial gain to the equity capital due to the debt capital. financial risk in an exceedingly company is related to the capital structure of the corporate. The capital structure of the corporate consists of equity funds and borrowed funds. The presence of debt and preference capital ends up in a commitment of paying interest or prefixed rate of dividend. The residual financial gain alone would be accessible to the equity holders. The interest payment affects the payments that are due to the equity investors. The debt funding will increase the variability of the comebacks to the ordinary shares holders and affects their http://www.iaeme.com/IJM/index.asp 101 editor@iaeme.com
Dr. Giriraj Kiradoo expectations concerning the return. the utilization of debt with the owned funds to extend the come back to the shareholders is understood as financial leverage Debt funding permits the company to own funds at a low value and financial leverage to the shareholders. As long because the earnings of an organization ar over the price of borrowed funds, shareholders’ earnings ar enhanced. At an identical time, once the earnings are low, it should result in bankruptcy to equity holders. The financial risk considers the distinction between EBIT and EBT (earnings before tax). The business risk causes variations between revenue and EBIT. The payment of interest affects the ultimate earnings of the corporate stock. Thus, volatility within the rates of come back on the stock is exaggerated by the borrowed cash. The variations in financial gain caused by the borrowed funds in extremely levered corporations are bigger compared to the businesses with low leverage. The financial leverage or financial risk is an avertable risk because it's the management who should decide, what quantity to be funded with the equity capital and borrowed capital 5. CONCLUSION The process of performing a risk assessment can give your project a greater chance of success. Assessments lead to the expression of outcomes as ranges, the development of risk mitigation plans, and the ability to set contingency. Risk Analysis provides a comprehensive means of determining confidence levels for project success, together with quick and easy techniques for determining contingency and risk Risks must be actively monitored and new risks must be responded to as they are discovered. Risk monitoring and control is the process of monitoring identified risks for signs that they may be occurring, controlling identified risks with the agreed responses, and looking for new risks that may creep into the project. Risk monitoring and control also is concerned with the documentation of the success or failure of risk response plans, and keeping records of metrics that signal risks are occurring, fading, or disappearing from the project. REFERENCE [1] Boehm, B. and R. Turner, "Using Risk to Balance Agile and Plan-Driven Methods." 36(6), 2003, pp 57-66. [2] Miguel Jiménez-Gómez and Natalia Acevedo-Prins, Decrease in Market Risk for the Equity Market in Colombia with International Assets, International Journal of Mechanical Engineering and Technology 9(8), 2018, pp. 1111–1117. [3] Larman, C, Agile and Iterative Development: A Manager's Guide. Boston, Addison Wesley, 2004 [4] Dr. Murlidhar Panga, Anjali Malpani (Singi) and Ajay Malpani, A Study of Factors Affecting Investors’ Decision Towards Making Investments in Financial Market, Journal of Management, 5(3), 2018, pp. 169–177 [5] Andrei Viktorovich Plotnikov, Pavel Alexandrovich Kuznetsov, Anna Alexandrowna Urasova and Elvir Munirovich Akhmetshin, Correlation Analysis Of The Data On The Uk And Us Market For Contextual Advertising International Journal of Civil Engineering and Technology, 9(11), 2018, pp. 1630– 1639. [6] Van Scoy, R. L., "Development Risk: Opportunity, Institute, Pittsburgh, PA CMU/SEI92- TR-030. [7] Mr. Sandip Dhakecha, A Study on Effectiveness of Cause Related Marketing [Crm] As A Strategic Philanthropy In Terms Of Brand Popularity & Sales, International Journal of Marketing and Human Resource Management (IJMHRM),Volume 4, Issue 1, January- April (2013), pp. 28-39 http://www.iaeme.com/IJM/index.asp 102 editor@iaeme.com
Study and Analysis of Project Risk, Market Risk and Firm Risk [8] Jayanth Varma, “Indian Money Market: Market Structure, Covered Parity and Term Structure”, The ICFAI Journal of Applied Finance, July 1997, Vol 3, No: 2, pp 1- 10 [9] Dr. S. Nadarajan and M. Josephin Rangith, A Study on Strength, Weakness, Opportunities and Threats in Rural Marketing. Journal of Management, 5(1), 2018, pp. 54–59. [10] Sudev As and Raghunandan Mv, A Research On Significance And Dependence Of Marketing Channels; A Study Based On Fmcg Industry, International Journal of Mechanical Engineering and Technology, 9(11), 2018, pp. 1051–1060. [11] Prof. Deepa Chavan, Dr.Makarand Upadhyaya, an Analytical Study of Indian Money Markets and Examining the Impact of Inflation, Journal of Management (JOM), Volume 1, Issue 1, July-December (2013), pp. 54-60 http://www.iaeme.com/IJM/index.asp 103 editor@iaeme.com