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Risk analysis in investment projects.


The investments represent the only means by which to ensure the medium and long term development. They are based on projects thoroughly grounded and integrated sustainable progress in strategic use of company resources in order to create conditions for ethnic, economic and human resources progress.

In these programs, there usually are several types of investment projects of which there are no relationships or interconditionare. For this reason we talk about three categories of projects: self-complementary (choice of one depends on the choice of another project) and exclusive (mutually exclusive projects) (Ispas & Cotet, 1998).

The decision to invest in an organization means crossing a minimum of logical steps and is adopted in the confrontation between needs and resources are determined primarily based on business strategy, the program properly and for projects designed to meet objectives. Decision criteria in investment decision making are very diverse, but most important is defined by setting the technical, economic and social risk that might manifest in investment performance (Schuyler, 2001).

The risk has a universal event that can occur in any human activity or action, but it is widely accepted that assessment of all economic activities, investment behavior at higher risk. In practice, investment is seen as an expense in order to obtain goods and services. A treat investment as a pure expense, means neglecting the concrete. In addition, investment projects constiuie a complete and autonomous action, involving the purchase and exploitation. This approach is more operational and we can distinguish innovation projects, expansion projects, projects to increase productivity and strategic projects (Galatti, 2003).

Among the most important sources of risk in investment decision are: the error in the analysis of investment opportunities, the estimation of data on a project, incorrect assessment of the phenomena involved in the functioning of economic objective, the project scope in relation to the overall size of the business and the unpredictable changes of economic environment. To each influence factor correspond a risk category and the risk analysis in investment decision involves a classification or a risk systematisation.


The needs of investment risk appear if the investment projects which change the risk class of the organization. In other words, if the risk characteristic of investment projects does not change the overall business risk, projects profitability analyses do not pose special problems.

In a simple and consistent manner, the risks of investment projects can be designed in two essential coordinates: risks of income or revenue flows and costs or risks of payment flows.


Implementing the concept of security requires a full detailed and objective analysis of current and future aspects of the process and the risks it involves. Analysis conclusions should identifie the possible ways of manifestation of adverse events so that the measures taken should be based on rational evaluation of their recommendations and indicated they are accompanied and logical sequence of application, materialized in a precise methodology (Thibault, 2004).

Stages of the methodology of risk assessment include:

* The physical, functional, and staff analysis;

* Determining areas of vulnerability and possible remedies;

* Adjust the risk of vulnerability and areas of possible remedies based on associated models;

* Hierarchy of elements and parameters based on risk values;

* Review the risk;

* Comparison of results;

* Review the results using risk matrices;

* Reorganization of risk matrices based on the the hierarchy;

* Recalculation of the global risk;

* Establishment of attitude towards risk.

By combining risk investment capacity, we could build the risk--investment matrix, where investment is positioned on the vertical axis and risk on the horizontal axis.

First square is characterized by a high rate of investment in terms of minimum risk. The reduced risk may have as cause that the investment will pay off quickly, the market quickly and continuously absorbed a large number of products offered, as a result of the investment.

Strategic actions that impose the event aim to strengthen the competitive advantage (market entry before competitors. In this sense it will maintain the minimum level of risk by blocking the technological processes.

Similar to first square the investments grouped in the second square, developing products with high risk, because the investments are important compared with the size of financial dimension. Such initiatives are followed in general, only by large companies. Although small and medium organizations can achieve impressive results, this is rarely sufficient to be successful. Despite the large size of the market to which it addressed the new product, as the product risk is high. A method for reducing the risk lies in its dispersion through the development of independent channels of distribution. The ideal would be to first remove the square, but the risk reduction is feasible in the existing cell.

The combination of risk and investment in a "likely" situation is most often encountered in practice. The vast majority of new business is the initial point of departure a minimum investment which produces the maximum profit. The more common route of access to the same kind of business, the likelihood probability of increasing the number of competitors is higher. The most feasible strategies are those aimed at reducing risk. Last but not least, another option is to strategically develop a business as a franchise.

Low risk may be due either to a low level of competition, are a large demand for the product concerned. Many large organizations have started modestly with an initial minimum investment. The strategy is to remain in the square and four to keep competitors out of him, assuming both a yield and a limited strictly controlled development.

When the product sold may be located in one of four square presented may be considered some strategies to follow. Evaluation of an investment project requires the assessment of the risk associated with future cash flows. Thus, the estimated risk of the expected profitability can be assessed according to the nature of the investment project under consideration.

Replacement investments are intended to maintain the productive capacity of the existing. Projects aimed at reducing operating costs, such as replacement of technologies used by other new generation ones, whose effect manifests itself in increased efficiency and use of personnel or equipment are also treated as replacement investment. The assessment of investment needs comparing replacement value company in the conduct of the respective investments in the investment option the replacement would not do, which is synonymous with opportunity cost of assessing the size of which is cash flow in the company would not proceed with the replacement of fixed assets run.

Investment projects that aim to expand the capacity or the existing market outlets are also a little risky. In terms of risk associated with size, category characterized by high risks is represented by investments in obtaining and marketing of new products. The probability that evolution the estimated future cash flows take place in reality at the level planned is therefore relatively new.

The specific analysis of investment projects should also address the influence or determination relationship that generates cash flows released from the new investment on existing assets.

The classification of investment projects according to the dependent of their other projects allows the identification of four major categories: independent investment projects, investment projects of mutual excessive investment projects contingent and complementary investment projects.

The acceptance or rejection of an independent project does not prevent the acceptance or the rejection of other projects. The evaluation of such a project is done only by taking into account the effect induced by it on the company (Pingaut & Gourc, 2003).

The investments can be characterized as mutually exclusive if the acceptance of one generates the elimination of other projects. This case is in reality the choice of an investment based on an exhibition of auction bids.

Investment projects are dependent on contingent acceptance of another project, and complementary investment projects are those projects that generate cash flows and on other projects.

The analysis of specific investment projects should also address the relationship of water weight which generates cash flows released from new investment business.


The risk is a universal notion which may refer to any human activity or action, but it is widely accepted that assessment of economic activities, investment behavior at higher risk. At least three factors determine the risk in the investments: the time you get the investment and the difficulty of forecasting to be done to determine the exact effects, irreversible nature of investment, size of the investment effort in case of failure turn into losses. Therefore, risk assessment is a prerequisite in the calculation and analysis of efficiency investments.


Galatti, R. (2003). Risk Management and Capital Adequacy, Mc'Graw-Hill, USA

Ispas, C.; Cotet, E.C. (1998). Project Management Concepts, Ed. Bren, Bucharest

Pingaut, H. ; Gourc, D. (2003). Risk analysis of an industrial project, Montreal

Schuyler, J. (2001). Risk and Decision Analysis in Projects, Second Edition, Project Management Institute, Upper Darby

Thibault, F.; Soyer I.; Riout J. (2004). Risks ierarhisation and acceptability evaluation tools, Bourges
Tab. 1. The impact of risk on various projects for investment

Investment Income risks Cost risks

 Level of Influence Level of Influence
 project over the project over the
 risks organisation risks organisation

Investment Average Compearable Average Compearabl
to reduce to the e to the
production existing existing
costs activity activity

-Extending Moderate Sensitive Moderate Sensitive
the current
work High Important High Important

Strategic High Strong High Strong

Investment Moderate Difficult to Moderate Weak
to improve estimate

Investment Without Inexistent Low Weak
s imposed incident
by legal

Fig. 1. Risk--investment matrix

 Square I (I+r) Square II (I+R)
 Big investment Big investment
 Minimum risk Maximum risk

 Square III (i+r) Square IV (i+R)
Minimum investment Minimum investment
 Minimum risk Maximum risk
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Author:Ispas, Constantin; Lovin, Eduard; Tilina, Dana
Publication:Annals of DAAAM & Proceedings
Article Type:Report
Geographic Code:4EUAU
Date:Jan 1, 2009
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