Risk analysis of investment project.
This paper develops a methodology of strategic management of company value taking into account the risks of the projects. The authors used a new measure of risk, propose a methodology for their selection through several criteria and indicators.
Project risks: the traditional approach to analysis.
Project risk is a concept associated with the uncertainty of the outcome (effect) of the investment project.
Another interpretation of risk is: the possibility of unforeseen adverse events that could have a negative impact on the effect of the project.
List the types of investment project risks.
Market uncertainty sales volumes of product of the project.
Capital — the possibility of bad move the constructive phase of the project or the uncertainty of its results (in the General case.
Operating (they include cost, managerial, technical and environmental ) — neopredelennostei of the project in its productive period, when the assets are commissioned and the project produces products or services.
Legal (political, legal, sovereign) — ability to change the legal environment in which the business of stopping the project for political or legal reasons, change the project status due to wars, local conflicts, revolutions, etc.
Financial (interest rate, currency) is the uncertainty of the exchange and interest rates in the financial markets and the sensitivity to them of the effect of the project.
Credit combines all the previous risks and their consequence. Is the possibility of insolvency of the project (or initiators) provided for its implementation credits and loans [2, 6.
Recommended traditional methods of research risks.
Sensitivity analysis (sensitivity analysis) — assessing the influence of the main parameters of the financial model on the resulting index (NPV). It is assumed that the uncertainty of each parameter is mainly tied to any one type of risk. If the risk is significant, then it should pay the most attention.
Thus, the sensitivity analysis allows to estimate and analyze project risks (tab. 1.
Table 1. Possible risks of the project.
The corresponding parameter of the financial model.
Exchange rate (exchange rate) XR.
Definition and detailed list of possible types of damage specific to each of the identified risks and the list of methods of eliminating problems is to clarify in the instructions on the composition, valuation and risk management techniques of the investment project, developed by the risk management Department of the company.
Two methods of sensitivity analysis of the investment project.
In the implementation of sensitivity analysis you can use one of two methods.
1) the classic method of turning points (critical parameters.
2) method of risk ranking using the chart, “tornado” [3,4.
During the initial phases of developing projects and business plans (i.e. at the stage of investment proposals) can take only one more simple method “tornado”, and in the final stages of preparation (pre-feasibility study and feasibility study) should be analyzed by both methods.
Risk assessment method the turning points.
All project settings are fixed to the designed values, except one whose influence is studied. Then built the dependence of the NPV of this option (Fig. 1-2, tab. 2.
Fig. 1. The dependence of the NPV to changes in the level of sales.
Fig. 2. The dependence of the NPV of costs per unit of sales.
Table 2. The dependence of the NPV of total sales and costs per unit of sales.
The decline in sales volume.
The value of the parameter at which NPV = 0 is called critical (pivot point). The impact parameter and the degree of corresponding risk estimate by how very different its design and critical values. This difference (absolute, relative) represents the “margin of safety” project.
Subjectively evaluate how achievable the critical value of the parameter in the context of those assumptions, which received the designed value.
Critical values of some important parameters of the model have their own names.
The internal rate of return (IRR — Internal Rate of Return) is a critical point for the parameter “cost of capital” (the discount rate). At this rate the NPV = 0.
This figure can also be interpreted as the rate of return of the investment project (given cash flow.
Discounted payback period (DPB — Discounted Payback Period) is a critical point for the factor “lifetime project.” This is the time during which investments in the project are fully covered by cash flow from it (including the opportunity cost of capital.
The break-even point (break-even point) is a critical point for the factor “volume of production”. Break-even volume — the volume of production or sales in which the company does not incur losses.
Taken on the same interval break-even volume is usually defined as the volume of sales (production) at which profit is zero. However, in relation to the whole project it could be the average annual volume of products or services of the project in which NPV=0.
Risk assessment using chart “a tornado.
Another way to implement sensitivity analysis — plotting “tornado”, which helps to visualize the importance of various risk factors.
To construct this diagram it is necessary to make several consecutive steps.
1. To select the main parameters, which will be the sensitivity analysis on NPV (sales, costs, discount rate, etc.
2. Expert way to estimate what range can really be these settings: what are their maximum and minimum values.
3. For the maximum and minimum values of each of the selected parameters to find the corresponding change in NPV, assuming all other parameters constant, i.e. fixing them at the level of the projected values.
4. To build a column chart where you show these changes in NPV for each of the chosen parameters. Factor changes in NPV are arranged so that the parameters by which the maximum change in NPV that were in the top of the chart, and for which the minimum in the bottom half.
The chart will take a funnel form and external appearance will truly remind you of a tornado. At the top of the chart will be those parameters and the risk factors that have the most impact on the NPV of the project.
Example diagrams are shown in Fig. 3.
In table. 3 shows the ranges of the parameters and the increase of NVP.
Table 3. The ranges of the parameters and the corresponding gains NPV, billion rubles.
From Fig. 3 shows that the most significant project risk is associated with the preoperative period and the amount of capital investment in second place is market risk, the third interest. Closes the list of operational (cost) risk.
Scenario analysis (scenario analysis) is a method of risk analysis based on the analysis of scenarios of development of the project. When implementing scenario analysis formulated assumptions and estimated cash-flow budget for one but for three to five possible scenarios. If you change the scenario may change all parameters of the financial model.
First, this approach helps greatly to characterize the potential benefits and losses of the project (to map on the scale of possible benefits and losses). Second, it allows us to give a probabilistic description of the project as a whole.
To calculate the probabilistic characteristics of the project each of the scenarios is assigned its own probability of R.
Then calculated integral characteristics of the project.
1. The mathematical expectation of the NPV.
where NPV – net present value for the j-th scenario.
2. The standard deviation of the NPV.
(NPV) = [ P j * (j NPV – E(NPV)) 2 ] 0.5.
Knowing the mathematical expectation and standard deviation, we can try to construct a distribution curve for the NPV (most often the normal distribution.
On the basis of this curve can be found, the probability that NPV is less than zero. It also will be the likelihood that project profitability will be less than the discount rate adopted for calculation of NPV (Fig. 4.
In this case, for the evaluation of NPV is possible to take not only the cost of capital, but also any other rate, the probability of falling below which you want to evaluate 1.
Such an approach assesses the “threat” of the project risk, i.e., takes into account possible losses that may arise from the decision.
The technique of scenario analysis is illustrated in Appendix 1.
Some of the modern measures of the risk of projects and their application in the analysis of projects.
Value at risk assesses the threat risk of the investment project. This is the magnitude of the potential threat to the company’s values posed by the adoption of the investment project.
Project VaR is the maximum loss of value that may be incurred by the company with a probability of 100% when making investment project.
VaR is the minimum loss value that can be paid to the company if accepted the project will be one of the a% of the worst it projects.
Read more about VaR assets or portfolios of assets and methods of their estimation can be viewed in the relevant literature [2,6-9.
To calculate the individual VaR of the project.
The easiest way to determine the VaR of the project is to implement the following steps.
1. Make the necessary assumptions and calculate the efficiency of the project not one, but three or five of the scenarios (e.g., optimistic, moderately optimistic, most probable, pessimistic and moderately pessimistic.
2.Each Y-th scenario of the expert to assign the probability of implementation of R. the sum of the probabilities for all scenarios equal to one.