Project investing in conditions of uncertainty and risk

Abstract

Project effectiveness assessment always includes a preliminary assessment of the consequences of its implementation, expressed in cash or resource flows. Thus, it is a form of forecasting that introduces an element of uncertainty into the assessment results. When we talk about risk and uncertainty, we usually mean that the actual conditions for project implementation are not precisely known or are not sufficiently described. Uncertainty refers to the incompleteness and inaccuracy of information about the conditions for project implementation. Thus, the concept of "uncertainty", regardless of its causes, is applied to the conditions for project implementation and, as a result, to its costs, results and performance indicators. Risk is understood as the possibility of conditions that will lead to negative consequences for the project participant. It should be noted that the concept of risk, unlike uncertainty, is subjective. Risk is an important component in assessing investment opportunities. Investors consider lower risk when investing to be more profitable. The lower the investment risk, the more profitable the investment. However, the higher the risk, the better the return. During the development process, each project goes through several stages. These stages are collectively called the project life cycle or lifespan, which is the period from the start of the project to its completion. Each stage has its own risks, and before assessing the investment project as a whole, it is important to conduct a risk assessment at each stage of the life cycle. The initial stage of the model involves determining the goals and objectives of the investment project, while the second stage involves determining the schedule and amount of financing. The third stage includes team formation, establishing contacts, purchasing equipment, raw materials and materials, concluding contracts for the construction of buildings and structures, etc. The next stage is directly related to the launch of the project and the organization of production and distribution chains. The final stage of the investment project life cycle involves the liquidation of the enterprise. Sensitivity analysis, which is used to measure risk, identifies the factors that have the greatest impact on the current value and quantifies this impact. Effective analysis of investment risks requires a combination of a formal approach and empirical methods. To evaluate an investment project under conditions of risk and uncertainty, it is necessary to take into account all areas that may affect the outcome of the project.