This is present when future events occur with measurable probability
This is present when the likelihood of future events is incalculable
Risk & Uncertainty
Risk refers to the situation where probabilities can be assigned to a range of expected outcomes arising from an investment project and the likelihood of each outcome occurring can therefore be quantified
Uncertainty refers to the situation where probabilities cannot be assigned to expected outcomes. Investment project risk therefore increases with increasing variability of returns, while uncertainty increases with increasing project life
The analysis so far has assumed that all of the future cash flows are known with certainty. However, future cash flows are often uncertain or difficult to estimate.
A number of techniques are available for handling this complication. Some of these techniques are quite technical involving computer simulations or advanced mathematical skills and are beyond the scope of F9.
However, we can provide some very useful information to managers without getting too technical.
So there are 4 techniques we are going to look at: