JINCY C K ROLL NO: 11

A project simply refers to any investment opportunity which is to be exploited for profit. Project is an idea or plan which is intended to be carried out. It may consist of a new product, new service, new organisation, new business or a new process.

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A project involves investment of money and moneys worth. It is a risky venture. It has a fixed set of objectives. Every project has risk and uncertainty associated with it. A project requires team work. It has a life cycle reflected by growth , maturity and decay.

Every investment is characterised by return and risk. In general, it refers to the possibility of incurring a loss in a financial transaction.

This possibility of variation of the actual return from the expected return is termed risk. Risk arises where there is a possibility of variation between expectations and realizations with regard to an investment. Total risk = systematic risk+ unsystematic risk

The impact of economic, political and social changes is system-wide and that portion of total variability in security returns caused by such system-wide factors is referred to as systematic risk. Systematic risk is further subdivided into  Interest rate risk  Market risk  Purchasing power risk

The returns from a security may sometimes vary because of certain factors affecting only the company issuing such security, Eg: labour strike, management inefficiency When variability of return occurs because of such firm-specific factors, it is known as unsystematic risk.

Completing the project in time and within the estimated cost itself is a major achievement. A project that is delayed will result in time over-run which will consequently result in cost over-run. There can be also technology failures, which may result in non-completion of project.

Raw material, power, fuel, manpower etc., are the resources used by a project. Shortage of raw material may lead to reduction in capacity utilization and higher cost of production, which will make all profitability estimates wrong.

Price fluctuations of both inputs and outputs affect the project. Unforeseen happenings such as Governments intentions in price fixation, ability of competitors to offer their product to customers at a comparatively cheaper price etc., are likely to have an effect.

Fluctuations in interest may bring in an adverse effect. If the interest rate increases in future, the interest on working capital finance increases which will result in lower profit margins than estimated at the time of project appraisal.

Technology risk may appear in two forms. A project that is based on unproven technology may have hidden defects which may make the project a non-starter. Rapid growth in technology may make a project obsolete in technology due to the evolution of latest technology.

The Government intervenes in many forms such as levying and regulating taxes, regulating monopolistic trade practices, imposing import duties, promoting exports, prohibiting export of certain commodities, issuing import licenses, controlling foreign exchange transactions, price controls etc. Political risk is a major risk since it cannot be predicted easily.

Exchange rate risk also called currency risk. It is the risk arising from currency fluctuations. Volatile exchange rates can reduce cost and productivity advantages gained over years of hard work. Firms exposed to international economy face this risk. When a firm has already committed to a foreign currency denominated transaction, the firm is exposed to exchange rate risk.