— prevents the project from being completed successfully * Business risks — prevents the project from being profitable * The focus here is business risk... rea Pa1. Risk identification and Ranking 2. Risk and net present value 3. Cost- benefit analysis ‘DeSKiNveths ASP/CSE Keo 4. Risk profile analysis 5. Using decision treesconstructing project risk matrix utilizing a checklist of possible risks and classify according to its relative importance and likelihood The table illustrates a basic project risk matrix listing some of the business risks for a project, with their importance and likelihood classified as high(H), medium(M), low(L) or exceedingly unlikely (_) The project risk mai be used a8 3 way of evaluating projets those with high nd ranking the ks for 3 specie Project. erry as a‘The project risk matrix may be used as a way of evaluating projects (those with high risks being less favoured) or as. a means of identifying and ranking the risks for a specific project. Risk Importance Ukelinood Client rejects proposed look and feel of sit x = Competitors undercut prices H M Warehouse unable to deal with inc mand M L Online payment has security problems M M Maintenance costs higher than estimated Response times deter purchasers poten v Ca ee ere ar 5* If project is relatively risky, then use higher discount pe a rate to calculate NPV \ e ZeL —a\1/ * Reasonably safe project > additional 2% risk premium sane bocluue * Fairly risky project > additional 5% risk premium (Sz — * Risks are generally categorized using scoring method...and /...some means of considering risk... ys oee Itis required to consider each possible outcome Estimate the probability of its occurring and the corresponding value of the outcome Ba Ch SINEIE Coen iloW, Cone iueauc ce2n low ices Each with an associated probability of occurring The value of the project is then obtained by summing the cost or benefit for each possible outcome weighted by its corresponding probability es 6sItis required to consider each possible outcome Estimate the probability of its occurring and the corresponding value of the outcome Each with an associated probability of occurring The value of the project is then obtained by summing the cost or benefit for each possible outcome weighted by its corresponding probability eas cc°A roll project’s cost-benefit analysis by Company X..\. Sales Tonval sa Probability Expeced meas Cor i p bcp TE ne aa UT OT. 33000 03 20000 son000 eas 6‘An approach which attempts to overcome some of the objections to cost-benefit averaging is the construction of risk profiles using sensitivity analysis This involves varying each of the parameters that affect the project's cost or benefits to ascertain how sensitive the project's profitability is to each factor. We might, for example, vary one of our original estimates by plus or minus 5% and recalculate the expected costs and benefits for the project. By repeating this exercise for each of our estimates in turn we can evaluate the sensitivity of the project to each factor. By studying the results of a sensitivity analysis we can identify those factors that are evo porn to soso of te eo portant to thé Success of the project. We then need to decide whether we can exercise gre OT Over them Or otherwise mitigate their effects. If neither isthe case, then we must live with the risk or abandon the project. eas caExtend Replace Expansion NoExpansion Expansion NoExpansion ya ‘NPV 41,00,000 NPV 75,000 NPV 2,50,000 NPV -50,000