IS IT WORTH THE RISK? WEIGHING CAPITAL INVESTMENTS.

Risk is the qualitative expression of the probability for success or failure of a project. Low risk is usually associated with projects for which costs and benefits can be calculated based on significant experience and reliable data. High risk, on the other hand, is usually associated with projects for which costs and benefits are difficult to assign precisely. The article presents a 3-step technique for including risk estimate in the basic analysis of a capital investment project. The three steps are - in order of increasing complexity - Probability Analysis, The Decision Tree, and Sensitivity Analysis. Each step after the first adds another perspective to improve the validity of the evaluation.