Environmental Engineering Reference
In-Depth Information
Table 4. The project risk profile (PRP)
Risk areas (Departments/areas of responsibility)
Project (i)
Project (ii)
Risk value/profile
Department A
-2.3
-3.1
Department B
-3.6
-2.0
Department C
-0.5
-0.4
Department D
-0.2
-0.7
Department E
-0.9
-0.8
Project Risk Area Index
RAI -3.6 Dept. B
RAI -3.1 Dept. A
The project RAI is based on the highest risk value shown by the risk profile.
Extreme 'risk impact' area and value:
Department A: 11.2 (D. of V.
8.4%) Risk element 2.
Department B: 12.3 (D. of V.
10.1%) Risk element 1.
Highest Degree of Variance:
Probability: Risk element 6.
Dept. E. 14.2%
Impact: Risk element 5. Dept.
E. 13.7%
Project (ii)
has a capital cost of $1,673,000 with
an estimated life of fourteen years. It has a
higher net present value of $1,938.000, but
a longer payback period of over six years.
The project repays only just above twice
its original cost, has a low marginal growth
rate of 5.65%, and a
low
classification for
the abandonment value.
impact values. It is assumed that there are seven
risk elements (project specific risks). The degree
of variance is the coefficient of variation in the
suggested values. The coefficient of variation is a
relative measure of dispersion from the mean and
is equal to the ratio of the standard deviation to
the mean. After applying a disutility factor to the
suggested impact value, a disutility impact value
is arrived at. Based on the above the project risk
profile is prepared.
The project risk profiles of the two projects
show (see Table 4.):
Although project (ii) shows a higher NPV than
project (i), and under the NPV rule should therefore
be accepted, all the other financial indicators are
significantly in favour of project (i).
Project (i).
The highest risk is in department B at
-3.6 (which, on a scale of zero to minus 10,
is relatively low). The extreme risk impact
is in department A with respect of risk ele-
ment 2 at 11.2 (on a scale of 1 to 100) with
a degree of variance in the appraisal team
members' individual values of 8.4%. The
profile also identifies that the highest degree
of variance in the values put forward by the
appraisal team members was with respect
to risk element 6 in department E at 14.2%
- this indicates a degree of uncertainty with
respect to the probability of this particular
risk occurring.
Project Specific Risk
With respect to the assessment of a project's
specific risk, the company has established five
risk management areas of responsibility (Depart-
ments A-E) and has determined a corporate risk
threshold rating of seven. The company also ac-
cepts the notion of applying a weighting to the risk
'impact' values, to take into account the greater
'importance' of higher impact values (Lefley
2008b). With the aid of external consultants, it
has therefore arrived at a weighting formula to
be used to calculate the appropriate disutility
