Stand Alone Risk Essay

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Capital investments decisions are vital to a business’s long term success or failure (Gapenski, L. C., Reiter, K. L., 2016, p 561). Capital investment decisions are more significant than other financial decisions because of the long term commitment of cash and resources. Senior management and hospital boards must ensue there is due diligence performed on a project before financial resources are committed. Risk analysis is a vital element in that decision process. This analysis provides decision support for project selection. Risk analysis has three components; defining the type of risk, measuring the risk, and incorporating the risk into the capital budgeting decision process. Using these elements for risk analysis and the organization’s average …show more content…

In fact, stand-alone risk is the only risk than can be calculated. The stand-alone risk calculation utilizes known values. Stand-alone risk can be measured by the standard deviation or the coefficient of variation of the projects profitability. The profitability or the return on investment (ROI) is measured by net present value (NPV), internal rate of return (IRR), or modified internal rate of return (MIRR). The larger the values the more likely the ROI will be lower than expected and the higher the risk. Because stand-alone risk can be easily calculated it is used to help evaluate the corporate risk and the market …show more content…

The correlation with the stand-alone risk calculation provides a simple method to compare the risk of a new project or multiple projects. The stand-alone risk is compared to the average risk of the not-for profit business’s corporate risk. In a for-profit business the stand-alone risk is compared to the risk of an investor in the stock market. Without this correlation it would be impossible to compare one project to another. The exception to the correlation occurs when the returns are expected to be independent to the business’s average risk or is negatively correlated with the business’s average project. In these cases the risk may be understated by the stand-alone risk

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