Risk Analysis in Capital Budgeting
Expert-defined terms from the Advanced Certificate in Budgeting For Capital Expenditures course at London School of Planning and Management. Free to read, free to share, paired with a globally recognised certification pathway.
Accounting Rate of Return (ARR) is a method used in capital budgeting to… #
Accounting Rate of Return (ARR) is a method used in capital budgeting to evaluate investment projects, calculated by dividing the average annual net income by the average total investment, it does not consider the time value of money.
Accuracy in forecasting is crucial in risk analysis as it helps to minimi… #
Accuracy in forecasting is crucial in risk analysis as it helps to minimize the uncertainty associated with the investment, historical data can be used to improve the accuracy of forecasts.
Addition Rule in probability theory is used to calculate the probability… #
Addition Rule in probability theory is used to calculate the probability of either of two events occurring, it is used in risk analysis to calculate the probability of different outcomes.
Adjusted Present Value (APV) is a method used in capital budgeting to eva… #
Adjusted Present Value (APV) is a method used in capital budgeting to evaluate investment projects, it takes into account the tax benefits of debt financing.
Agency Cost refers to the costs associated with the principal #
agent relationship, it can be a significant factor in risk analysis as it can affect the decision-making process.
Alternative Investment is an investment that is not a traditional investment suc… #
Alternative Investment is an investment that is not a traditional investment such as stocks or bonds, examples include private equity and hedge funds.
Amortization is the process of gradually writing off the cost of an intangibl… #
Amortization is the process of gradually writing off the cost of an intangible asset over its useful life, it can be used to calculate the tax benefits of an investment.
Annualized Rate of Return is the rate of return of an investment over a one #
year period, it can be used to compare the performance of different investments.
Annuity is a series of fixed payments made at regular intervals over a specified… #
Annuity is a series of fixed payments made at regular intervals over a specified period, it can be used to calculate the present value of an investment.
Arbitrage is the practice of taking advantage of a price difference between two… #
Arbitrage is the practice of taking advantage of a price difference between two or more markets, it can be used to hedge against risk.
Asset Beta is a measure of the systematic risk of an asset, it can be use… #
Asset Beta is a measure of the systematic risk of an asset, it can be used to calculate the cost of capital of an investment.
Asset Pricing Model is a model used to calculate the expected return of an as… #
Asset Pricing Model is a model used to calculate the expected return of an asset, examples include the Capital Asset Pricing Model (CAPM).
Asymmetric Information refers to a situation where one party has more or better… #
Asymmetric Information refers to a situation where one party has more or better information than another party, it can be a significant factor in risk analysis as it can affect the decision-making process.
Audit Committee is a committee responsible for overseeing the financial repor… #
Audit Committee is a committee responsible for overseeing the financial reporting process of a company, it can play a crucial role in risk analysis by ensuring the accuracy of financial reports.
Autocorrelation refers to the correlation between a variable and its past… #
Autocorrelation refers to the correlation between a variable and its past values, it can be used to identify trends in data.
Availability Heuristic is a cognitive bias that refers to the tendency to… #
Availability Heuristic is a cognitive bias that refers to the tendency to overestimate the importance of information that is readily available.
Average Collection Period is the average amount of time it takes for a company t… #
Average Collection Period is the average amount of time it takes for a company to collect its accounts receivable, it can be used to calculate the cash flow of a company.
Average Inventory Period is the average amount of time it takes for a company to… #
Average Inventory Period is the average amount of time it takes for a company to sell its inventory, it can be used to calculate the cash flow of a company.
Average Payment Period is the average amount of time it takes for a company to p… #
Average Payment Period is the average amount of time it takes for a company to pay its accounts payable, it can be used to calculate the cash flow of a company.
Average Revenue Per User (ARPU) is the average amount of revenue generated per u… #
Average Revenue Per User (ARPU) is the average amount of revenue generated per user, it can be used to calculate the revenue of a company.
Avoidable Cost is a cost that can be avoided if a particular action is no… #
Avoidable Cost is a cost that can be avoided if a particular action is not taken, it can be used to calculate the cost savings of an investment.
Backwardation refers to a situation where the spot price of a commodity i… #
Backwardation refers to a situation where the spot price of a commodity is higher than its future price, it can be used to hedge against risk.
Bankruptcy Cost refers to the costs associated with bankruptcy , it can be… #
Bankruptcy Cost refers to the costs associated with bankruptcy, it can be a significant factor in risk analysis as it can affect the viability of a company.
Base Rate refers to the interest rate set by a central bank, it can be us… #
Base Rate refers to the interest rate set by a central bank, it can be used to calculate the cost of capital of an investment.
Behavioral Finance is a field of study that examines how psychological fa… #
Behavioral Finance is a field of study that examines how psychological factors influence investment decisions, it can be used to identify bias in decision-making.
Benchmark refers to a standard or reference point used to evaluate the <b… #
Benchmark refers to a standard or reference point used to evaluate the performance of an investment, examples include the S&P 500 index.
Benefit #
Cost Ratio is a ratio used to evaluate the cost-effectiveness of an investment, it can be used to calculate the return on investment (ROI).
Best Practices refer to the most effective and efficient ways of doing so… #
Best Practices refer to the most effective and efficient ways of doing something, it can be used to improve the performance of an investment.
Beta is a measure of the systematic risk of an asset, it can be used to c… #
Beta is a measure of the systematic risk of an asset, it can be used to calculate the cost of capital of an investment.
Binomial Distribution is a probability distribution used to model the outcome… #
Binomial Distribution is a probability distribution used to model the outcomes of a series of independent trials, it can be used to calculate the probability of different outcomes.
Black #
Scholes Model is a model used to calculate the value of a call option or a put option, it can be used to hedge against risk.
Bond is a type of debt security that represents a loan made by an investo… #
Bond is a type of debt security that represents a loan made by an investor to a borrower, it can be used to calculate the cost of capital of an investment.
Book Value is the accounting value of an asset or a company, it can be us… #
Book Value is the accounting value of an asset or a company, it can be used to calculate the net worth of a company.
Bootstrapping is a method used to estimate the distribution of a statisti… #
Bootstrapping is a method used to estimate the distribution of a statistic, it can be used to calculate the confidence interval of an estimate.
Break #
Even Analysis is a method used to calculate the point at which the revenue of a company equals its costs, it can be used to evaluate the viability of an investment.
Break #
Even Point is the point at which the revenue of a company equals its costs, it can be used to evaluate the viability of an investment.
Breach of Contract refers to a situation where one party fails to fulfill its <i… #
Breach of Contract refers to a situation where one party fails to fulfill its obligations under a contract, it can be a significant factor in risk analysis as it can affect the viability of a company.
Business Cycle refers to the fluctuations in the economic activity of a c… #
Business Cycle refers to the fluctuations in the economic activity of a country or a region, it can be used to evaluate the macroeconomic environment of an investment.
Business Risk refers to the risks associated with the operations of a com… #
Business Risk refers to the risks associated with the operations of a company, it can be a significant factor in risk analysis as it can affect the viability of a company.
Capital Asset Pricing Model (CAPM) is a model used to calculate the expected ret… #
Capital Asset Pricing Model (CAPM) is a model used to calculate the expected return of an asset, it can be used to calculate the cost of capital of an investment.
Capital Budgeting is the process of evaluating and selecting investment proje… #
Capital Budgeting is the process of evaluating and selecting investment projects, it can be used to calculate the return on investment (ROI) of a project.
Capital Expenditure is an expenditure made by a company to acquire or improve a… #
Capital Expenditure is an expenditure made by a company to acquire or improve a long-term asset, it can be used to calculate the cost of capital of an investment.
Capital Lease is a type of lease that is treated as a capital expenditure … #
Capital Lease is a type of lease that is treated as a capital expenditure for accounting purposes, it can be used to calculate the cost of capital of an investment.
Capital Market is a market where securities are traded, it can be used to… #
Capital Market is a market where securities are traded, it can be used to raise capital for