The NPV equation specifically in relation to corporate risk management decisions

Project description
INDIVIDUAL ASSIGNMENTS

Choose ONE of Assignment A , B or C. Your assignment should be around 2,000-2,500 words long and typed if possible.

Assignment A:

This assignment is aimed at making you think about the cash flows that occur under different risk management decisions. To do the assignment you need to be familiar with the NPV method of investment appraisal as summarised in WSY8 on pages 333 – 337 or HN pages 585 588 or available in any textbook entitled ‘Corporate Finance’. Alternatively, satisfy yourself that if NPV is positive in the following equation a project is probably worth undertaking.

Ct
NPV = t – I
(1+k)

Where , Ct = net cash flows in period t
k = ‘a suitable discount rate’
I = the initial investment
t = time period

This equation is useful for investment projects in general but you are required to consider the NPV equation specifically in relation to corporate risk management decisions.

The title of your assignment and the question(s) you must answer is:

a) What are the real-world components of Ct, I and k for evaluating the following types of risk management activities at NPV?
i) risk retention
ii) risk transfer
iii) risk control, and
iv) risk avoidance.

AND

b) Provide practical suggestions for estimating realistic values for the variables identified in part a) of the question.

Hint: Remember that Ct represents net cash flows so you need to consider both positive and negative cash flows.