6.2 Mere using of these quantitative methods to take decision may be
misleading. The realities in the form of constraints, possible surfacing of
new problems and above all commonsense i.e., prudentness is required to
rank the projects.6.3 The major problem is, in reality, the longer the duration of the project, the
higher the defectiveness of estimations. Because in the long run the
positive NPV may be erased out and market may become even more
imperfect. Above all estimations not based on inflation accounting even
more be unrealistic, because inflation rate will reduce the real value of
future returns.6.4 Inspite of all such limitations, firms are using one or the other method/s to
take decisions.- Post-Audit
7.1 How far is the decision taken regarding the capital budget correct? This
requires audit i.e., by comparing the predictions with actual performance
and explaining the differences. The concurrent audit is even more
preferable, so that, the monthly reports of actual under different indicators
could be compared quickly with reference to estimations done. This will
enable the management to make corrections during the subsequent
operation process. This will improve the quality of subsequent estimates,
and improve the operations etc.Measurement of Risk
(Source:- From the book of Financial Management by Prof. M.Y. Khan & P.K. Jain)Investments are always exposed to different degrees of risk. Every uncertainty or the
degree of an uncertainty cannot be foreseen. Therefore a perfect prediction of cash flow
is not possible. That means risk is associated with the blind area of uncertainty.
The events that influence the forecasts may be grouped as:
- Events that influence the level of business activity
- Events that affect an entire industry
- Event that may affect a company
Business activities will be influenced by monetary and fiscal policies, economic policies,
political situations, law and order, industrial relations, changing technologies, natural
problems, change in management, labor problems etc.,
Risk is available associated with future returns of an investment. The Government bonds
are said to be risk-free because of 100% faith in Government where the default=0. This
is not so in the case of investment in shares.