Financial Risk Assessment of a Large Construction Project

The aim of this paper is to present an example of financial risk assessment of a construction project for a new heat and power plant in one of the cities in south-western Poland. The process of risk assessment involved identifying and classifying risks particular to the project at hand. Subsequently, we collected available information on investment conditions, and utilized it to calculate the basic net present value of the project. Taking into account investor's preferences and the available data, sensitivity analysis was chosen as the most appropriate risk assessment method. Sensitivity analysis involved determining breakpoint values and safety margins for the selected parameters of project profitability evaluation (sales revenue, fixed and variable costs, and the internal rate of return). The analysis we carried out led to the identification of the most important variable in the evaluation of project profitability, which in this case was the revenue from selling heat and electricity. Even a modest change in this parameter (in the order of several percent) could result in project unprofitability.