Risk Analysis in Capital Investment

A new method of assessing the risk of capital investments has been developed which is superior to traditional methods because it considers the probabilities of attaining various rates of return from alternative investments. It presents management with a more descriptive picture of the opportunities presented by these investments, it is easy to use, and it makes use of readily available information. This sharpens the picture of risk taken and returned hope for needed in capital planning. Management may choose to make an investment that does not promise as high a return as another alternative but is less risky and more probable of attainment. This risk analysis is performed by estimating the range values for each factor in the decision and the range of probability that it will occur. Choose one of these values for each factor, combine it with the values for all factors, and figure the rate of return of the combination. This should be done for each possible rate of return.