THE RISK ANALYSIS FOR INVESTMENTS PROJECTS DECISION

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1 les Uiversittis pulesis Series Oecoomic, 11(1), 2009 THE RSK NLYSS FOR NVESTMENTS PROJECTS DECSON Cmeli Burj 1 Vsile Burj 2 BSTRCT: Te risk sigifies te possibility of existece of oe situtio i wic te obtied results re fr from te trgeted objectives. ssumig te risk by te etrepreeurs becomes te source of profit witi te ecoomy; tis is te reso wy its lysis is prior objective i substtitig decisios relted o te ivestmets efficiecy. te pper tere re preseted some ctegories of risks tt c pper witi te ivestmet ctivity d is exemplified te risk lysis o te bse of studyig te projects sesitivity. Key words: ivestmets, risk, ecoomic performce, sesitivity lysis JEL codes: L21, L26, M21 troductio vestmet projects re subjected to vrious forms of risk tt c impct te performce expected by te beeficiry. Te fctors comig from te exterl eviromet, s well s te edogeous fctors specific to te opertiol d fuctiol structure of te ivestmet objective c ve i time differet mifesttio t te oe ticipted iitilly, d tus, te bigger re te oticed devitios, te iger is te risk of te project to fil to esure recig te expected results. geerl sese, te risk represets te probbility tt specific dverse effect or evet will occur i give popultio, wic sows tt future ecoomic ctio c geerte losses, especilly becuse of vig icomplete iformtio we mkig decisios or becuse of te icosistece of logicl resoig. Te risk mgemet will focus i tis cse o elimitig te egtive spects itroduced by te risk probbility, d te lysis will especilly study te potetil trets tt c ffect te projects profitbility i te future. [1] Te moder pproc of te risk cocept sees risk s costcy i te socio-ecoomic ctivities. Besides te losses it c cuse, sometimes irreversible, it c lso costitute opportuity for te eterprisers, wit te coditio to dopt dequte strtegies. complete defiitio of risks tt icorportes te two spects (tret d opportuity) cosiders risk s beig ucerti evet or coditio tt i cse of mifesttio will ve positive or egtive impct over te project s objective. Te project risk icludes te trets over te objective, s well s te opportuity to improve tese objectives [7]. Te presece of risks i te ecoomic eviromet is reltively costt, d teir lrge diversity mkes ecessry to idetify te elemets tt could be subjected to risks d wic c idetify te projects vibility d teir lysis from tis poit of view, i order to dimiis te egtive cosequeces.. See s ecoomic processes, te ivestmet projects drw i umerous resources wose vlue cosumptio mke te ivestmet cost: expeses for obtiig d settig up te ld, ifrstructure expeses, desig d tecicl ssistce expeses (liceces, greemets, utoriztios, desigig, project udit, tecicl ssistce d costructio site ispector, orgizig te vedue procedures), expeses wit te bsic ivestmet (costructios d works of 1 Uiversity 1 Decembrie 1918 of lb uli, N. org Street, lb uli, Romi, cmeliburj@yoo.com 2 Uiversity 1 Decembrie 1918 of lb uli, N. org Street, lb uli, Romi, vsileburj@yoo.com 98

2 les Uiversittis pulesis Series Oecoomic, 11(1), 2009 itervetio, expeses wit idepedet cquisitios), oter expeses (orgiztio of te buildig site, commissios, txes, legl fres, ficig costs, vrious d upredicted expeses), opertig expeses (triig te persoel for exploittio, tecologicl evideces, trils, lppig, expertise we received). Te expeses wit te implemettio of te project re direct d immedite, tey usully ru teir course durig period of 1 to 3 yers d becuse of tis tey re reltively esy to qutify d teir ssessmet s ig precisio level. Besides te cost of cievig te ivestmet, te globl cost of te ivestmet project will be give by te opertig cost geerted by settig i motio te ivestmet object, d tis must be ccurtely estimted for te complete ecoomic fuctioig period of te mde ivestmet. Tkig ito cosidertio te potetil price vritios or te vritios of te qutities eeded to cieve te project leds to te ide of ifluecig te cost prmeters d to te occurrece of te risk to dimiis te results. Tus, bigger difficulties to estimte ccurtely te ecoomic prmeters occur durig te project exploittio, becuse tis period s frter time orizo. B. Durig te process of ssessig te ecoomic effects, we must tke ito ccout te qutifible direct effects tt eed dequte estimtio for log period of opertig te ivestmet objective, s well te idirect effects, wic usully do t ve vlue expressio, teir forecst beig more difficult becuse of tis. te field of implemetig te ivestmet projects, te effects c ve pysicl expressio, s well s vlue expressio. Te qutittive results of te projects re obti by usig te productio cpcity of te objective d re expressed i te cieved pysicl productio or te volume of te pysicl sles o ctegories of products. Te types of te effects expressed s vlue re umerous d from teir ctegory re selected d rked tose results tt become ecoomic criterio i te ecoomic d ficil ssessmet of te ivestmet project: te exercise s productio, te turover, te dded vlue, te et profit, te cs flow, te tresury flow, opertig icomes, etc. Te qulity d efficiecy ssessmet of ivestmet project is ctully bsed o estimtio of te future cs-flows resulted from te ctivity of eterprise (from te public or te privte sector), idetifyig te key fctors d te potetil risks, usig coceptul model or frmework tt tkes ito ccout ll tese fctors, s well s testig te project s cpcity to plce te compy o successful positio o te mrket [8]. Te directios of ctio tt llow studyig te risks fced by ivestmet projects re: - detifyig te risk sources, meig to poit out te res tt iterct wit te project durig te cievemet d opertig of te ivestmet objective d wic c be ffected i te future by upredictble evolutio. Tese c be te ecoomic, ficil, tecicl, evirometl, legl, socil, etc., fields. Risks c lso occur becuse of oter cuse, suc s te wrog determitio of te project s opportuity, errors i te ecoomic peome progosis, te lck of correltio betwee te ficig sources d te objectives tt eed to be implemeted; - Estblisig te risk types tt c impct te project. Te risks re rked, te most importt beig cosidered te oes wit ig occurrece frequecy oticed t similr projects or estimted by experts; - ssessig te risk level wit te elp of vrious teciques of risk ssessmet, suc s: criticl poit, positio idictor, vritio coefficiet, sesitivity lysis, etc.; - Te lysis of vrious potetil situtios i te future, evlutig te risk occurrece cosequeces d te extet to wic it ffects te ecoomic-ficil vibility of te project. Te impossibility to ccurtely previsio te iformtio used i ssessig te projects (te productio d service volume, te qulittive level, prices, cosumptios, etc.) cuses te expected results to vry becuse of te risks; - Metioig te risk cotrol strtegies, meig to idicte te ecessry ctios to miimize te risk occurrece probbility, to dimiis or elimite tem. 99

3 les Uiversittis pulesis Series Oecoomic, 11(1), 2009 Geerlly, risk lysis mes te efficiecy d profitbility lysis of te projects i coditios of icertitude d risk, coditios i wic te vritio of te ifluece fctors (prmeters) mifests wit certi probbility. Risk ctegories for ivestmet projects first step i te risk lysis of te ivestmet projects is to idetify te vrious potetil risk ctegories tt c ffect teir vibility.. ctegory of potetil risks tt impct te eterpriser s ctivity i its reltiosip wit te mrket is mifested i te mrketig sector. Te strtegic risk cosists i dimiisig te eterpriser s mrket sre d ledig im to ficil losses. Mesurig te impct of tis risk clss is doe by determiig te vritio of te mrket sre owed mily to te cge i te demd of products specific to te compy. cse te reltiosips wit cliets d suppliers wo t mterilize t te level foresee i te cotrcts, commercil risk could occur. t will be felt by losig some cliets, wic mes te estimted productio will ot be completely tured ito ccout, icomigs wo t cover costs d terefore te erigs will drop. t te sme time, te commercil risk could led to ufulfilled reltiosips wit suppliers, wic mes te cost will be iflted wit sums derived from preprig te supply, mely commercil meetigs, prelimiry studies, drwig up te supply for products, wic lso lowers te ficil results of te project. Te legl risk comes from filig to subsume to te legisltio i effect durig te opertig of te objective, becuse of potetil cges of te legl stipultios regrdig pymet terms, txtio systems, orms, regultios. Te cosequeces of te legl risk occurrece re obvious i te pymet of pelties or i te occurrece of debts. Te pelty losses re clculted depedig o te umber of dys of dely, te dily cost d te verge level of te resource recordig te loss. For debts, te impct of te legl risk is give by mesurig te direct d idirect prejudice occurred s result of ot csig-i i time te sums owed by tird prties. Te ficil risk mes te possibility to record dditiol ficil expeses (te rise of te iterest rte, ufvourble excge rte), wic will led to dimiisig icomes or eve ficil losses. t c be mesured troug te lysis of cs flows d lo cost. Te opertiol risk is relted to cgig coditios tt ffect te opertig ctivity of te ivestmet objective. Kow lso s ecoomic risk or opertig risk, te opertiol risk impcts te productio costs sttemet d te profitbility level of te project. Te rise of te costs of rw mterils, fuels, eergy, work force or oter resources over te iitil estimtios mes icrese of te totl efforts d dequte drop i te erig i compriso to te expected level. Te opertiol risk ctully mifests i reltio wit te decrese of te ivestmet objective s cpcity to geerte profit uder te ifluece of te idequte mgemet of ssets. Te mitece d service risk is relted to exceedig te costs estblised i ccordce wit iccurte estimtios of te repirs expeses, to uforesee mlfuctios of te edowmets, to ccidets, etc. B. structurig of te risks ccordig to te elemets tke ito ccout for te clculus of te ivestmet project s efficiecy c lso be doe s follows: risks for te effort prmeters clled cost risks d risks for te effects prmeters, clled icome risks. Tese ctegories of risks exercise importt ifluece over te eterpriser tt strts ivestmet for moderiztio d expsio, tus vig ig impct. Te risks to fil to cieve te icomes or to exceed costs re mplified for strtegic ivestmets, wic ve s mteriliztio period frter time orizo. Te ivestmet projects tt trget to reduce te opertig expeses d te projects for te improvemet of te work coditios ve lower risk level. C. Depedig o te level of mifesttio, te risks tt ffect te ivestmet project c be: - dividul risks tt mesure te impct produced by te vritio of te ecoomic 100

4 les Uiversittis pulesis Series Oecoomic, 11(1), 2009 prmeter over te results, ssumig te compy s o oter ssets t tose resulted troug te project; - Te compy risk ffects te totl erigs of te eterpriser, itegrtig te ssets obtied from te ivestmet i te totl ptrimoy of te compy. Tis is te risk of te eterprise s wole s result of implemetig te ivestmet projects; - Te mrket risk refers to te risk of te project from te poit of view of te ivestor wo ows diversified stock portfolio. Becuse te compy risk d te mrket risk re difficult to mesure, most ofte te idividul risk specific to project c pproximte te oter risk ctegories, becuse tis risk is ctully direct ifluece o te risk for te eterpriser or for te ivestor. Risk lysis metods for ivestmet projects te re of ivestmet projects i te pre-ivestmet stge, te cievemet level of te prmeters specific for projects d te performce level c't be estblised wit precisio bsed o sttisticl iformtio. Te pre-estblised idictors levels will ve certi evolutio i te future; tey will be cieved wit certi probbility, tus cotributig to te size of te project risk. Te risk lysis for projects is tied to te probbilistic risk coceptio. Te cces to rec te project s prmeters c be estblised by experts bsed o teir ow ituitio d experieces (oe of te sources could be bristormig) s trust levels grted by tem for te productio of te ticipted peome, meig te probbility to rec certi level of te project s prmeters is ssessed. oter ssocitio metod of te occurrece probbility for te vribles of te project is to estblis precise rge of vlues roud te vlue of te prmeter used i te bsic versio. Te distributio of te probbility for ec optio c be ssimilted wit te oe obtied o experimetl bsis, i coditios s close s possible to te coditios of te project or i cse of similr projects. Oter metods to determie te probbility distributio for te prmeter of project c lso be used, suc s: Mote Crlo Simultio, Decisio Trees d Force Field lysis, wic were pplied to Sucor Bitume Selectio Strtegy d oter pplictios [12]. Te models used for te risk lysis re my d tey trget to qutify te risk level i order to void ituitive decisios d to icrese decisio qulity: te metod of te Net Preset Vlue, te sttistic idictors metod, te pybck period metod, Retur o vestmets RO, te sesitivity lysis, te metod of te terl Rte of Retur RR, te decisio tree metod, simultio, etc. [4], [6]. We will give exmple of oe of tese metods, mely te sesitivity lysis, becuse it s lrgely used metod for te ecoomic-ficil lysis of ivestmet projects. t give te possibility to idetify te criticl vribles of project, it llows estblisig te ficil sustibility level of te project give by te potetil cges of te ifluece fctors d it serves, t te sme time, to mesure te project risk i order to justify decisios. Te sesitivity lysis used to mesure te risk tkes ito cosidertio te idetifictio of te fctors tt ve te biggest ifluece over te et preset vlue d te qutifictio of tese iflueces. Te strt is te clculus of te et preset vlue, wic for projects is doe i sort period of time (less t yer) d s te followig formul [9], [10]: = =1 1 N ( + ) 101 were: N represets te et icomes geerted ully by te project; - te cost of te totl ivestmet; - discout rte (te cpitl cost). (1)

5 les Uiversittis pulesis Series Oecoomic, 11(1), 2009 order to clculte te of ivestmet projects i coditios of risk, we itroduce te risk elemet i te formul; it djusts te discout rte (te risk djusted discout rte metod - RDR). Te discout rte cosists of te risk-free rte i plus risk premium rp. Te iger is te risk, te iger te discout rte is [5]. = i+ rp (2) Bsed o tis reltio, formul (1) is trsformed i model tt igligts risks d qutifies te geerted effects, foud i. = =1 1 N ( + i+ (3) Te formul is cged s follows becuse te cs flows of te project express te et icome flows resulted ully from te project, wic re estblised depedig o te opertig expeses d te icomigs mde by sellig te productio d te services [2]: q = =1 1 ( p Ef + Em) ( + i+ (4) were: q is te qutity of products commercilized i yer ; p - product prices; Ef - uit expeses wit te lbour force; Em - uit expeses wit rw mterils d mterils. cse verge vlues re estimted for te icomes d expeses elemets, wic ifluece te cs flows q, p, Ef d Em, tese c be see s commo fctor d te formul becomes: = Ef Em) 1 + ( + i =1 1 (5) Te expressio ( + i+ = 1 1 cumulted RDR, wic s te vlue: 1 represets te cumulted discout fctor djusted to risk or ( i+ ( 1+ i+ 1 ( 1+ i+ period of yers d discout rte (bbrevited ext s ). Te simplified formul (5) is:. t is lso clled uity fctor for Ef Em) = (6) order to mesure te level of ifluece fctor tt could impct te size of te foresee et preset vlue, is cosidered tt te risk occurs we =0. Te criticl vlue of te ifluece fctor is determied from tt equtio. - te criticl level of te ivestmet: = Ef Em) (7) cr 102

6 les Uiversittis pulesis Series Oecoomic, 11(1), te criticl level of sles: q cr = Ef Em) (8) - te criticl level of te uit prices: p cr = Ef + Em+ (9) - te criticl level of te lbour force cost per product: Ef cr = p Em (10) - te criticl level of te mteril expeses per product: Em cr = p Ef (11) ssessig te sesitivity of te ifluece fctors is bsed o te reltive devitios of te criticl vlues clculted towrds te foresee iitil vlues. Fcr F % F = 100 F (12) were: F cr represets te criticl vlue of te ifluece fctor for wic te et preset vlue is zero; F - te vlue of te ifluece fctor estblised troug te iitil progosis. Te fctors wic ve low vritio (positive or egtive) re te more risky elemets for te ivestmet project. Te sesitivity of te ivestmet projects. Cse study order to exemplify te sesitivity lysis i ssessig te risk tt c occur i te evolutio of te project s criticl prmeters, we tke ito cosidertio project tt cretes ul productio cpcity of 1052 tos wit totl ivestmet of 1850 tousd lei. Te verge sellig price of te products obtied by settig i motio te ivestmet objective will be 5000lei/to, d te verge productio cost is estimted t 4520lei/to divided i 1240lei/to for lbour force expeses per product d 3280lei/to represet uit costs wit crude mterils, mterils d fuels. Te project will produce ecoomic effects for 9 yers d te cpitl cost (RDR) is 8%. Te et preset vlue of te project is: = Ef Em) = ( ) 6, lei = 1052 = Te criticl vlues of te ifluece fctors for wic =0 re: - Totl ivestmet: Ef Em) = 1052 ( ) 6,247= lei cr = sles volume: 103

7 les Uiversittis pulesis Series Oecoomic, 11(1), q cr = = = toe Ef Em) ( ) 6, te uit commerciliztio price of te products: p cr = Ef + Em+ = = lei , lbour force cost: Ef cr = p Em = = lei , crude mterils cost: Em cr = p Ef = = lei , Te sytesis of te risk resulted from te potetil vritio of te fctors over ot cievig te et preset vlue is sow i tble 1. Ecoomic-ficil idictors dictors (lei) itil level forecst i te Criticl level Reltive devitio project Totl ivestmet ,5 % ul sles volume ,3 % Uit price % Uit cost for lbour force % Uit cost for rw mterils ,1 % Tble o 1 Te obtied dt sow s mi risk fctor for te project te price for sellig te productio. Tere is possibility for te project to ot geerte positive updted cs flows we te commerciliztio prices drop wit more t 4%. Te project is lso sesitive to te ifluece of te prices of rw mterils d mterils cosumed i te exploittio; if teir cge ffects te icrese of te uit cost of te products wit more t 6%, it will result i ficil losses i compriso to te iitil forecst. Te project proves to be more stble to te vritio of te lbour force cost d especilly to te vritio of te sles volume. For te sesitivity lysis it resulted tt te most importt risk fctor for te lysed project is te sellig price, wic will direct efforts towrds te improvemet of te prcticed prices policy. Coclusios Becuse prctice proved tt te risk is ievitble peomeo i te life of ivestmet projects, te risk lysis s s mi objective te study of potetil ecoomic ltertives, of te cievemet probbility d te resulted effects. Te fct te ivestor kows te possible ufvourble cosequeces guides is ttitude towrds te project, meig tt i order to rec te set objective, oce te project is implemeted e will ve to lso ssume certi risk level. 104

8 les Uiversittis pulesis Series Oecoomic, 11(1), 2009 Risk lysis becomes qulittive lysis metod tt supplies te project mgers wit te ecessry istrumets i mkig better decisios, combiig scietific elemets wit rt [11]. te lysis process of te projects from te perspective of te risks tey ivolve, idetifyig te risk ctegory is ecessry step to strt from i order to better kow d mge te produced impct. spects like te followig will be trgeted: te descriptio of te specific elemets of te idetified risk, fctors tt produce it, te elemet or te ctivity tt will be iflueced by te risk, ssessig te size of te risk elemet closely tied to te occurrece probbility of te evet i questio d to te geerted impct. te ed, prevetio or rectifyig strtegies for te egtive cosequeces will be formulted. For some fields (public elt, griculture d food sfety, etc) studyig te potetil risks d qutifyig tem re importt ot oly for te selectio of te best optio, but lso for te public s perceptio [1]. Usig proper risk lysis metods icreses te eterpriser s cces to ccurtely justify decisio regrdig te opportuity of certi ivestmet projects, i order to cieve its specific iterests. Refereces: 1. Cerf O., Curret Defiitios of Risk for Food Sfety d iml Helt llow Risk ssessmets to Provide Substtilly Differet Outcomes, Risk lysis, Vol. 28, No. 4, Ciocoiu N. M., Risk Mgemet i Busiess d Projects (Mgemetul riscului î fceri şi proiecte), Editur SE, Bucrest, Cistelec L. M., Ecoomy, Efficiecy d vestmet Ficig (Ecoomi, eficieţ şi fiţre ivestiţiilor), Editur Ecoomic, Bucrest, Mirce., Ficil d cturil Mtemtics (Mtemtici ficire şi cturile), Editur Corit, Bucrest, Obermier R., Commet o Risk lysis i ivestmet pprisl bsed o te Mote Crlo simultio tecique by. Hcur, M. Jdmus-Hcur d. Kocot, Te Europe Pysicl Jourl B, Volume 30, Number 3, 2002, ttp:// 6. Pillips J. J., Pillips P. P., Sow Me te Moey (rtă-mi bii), Cum se determiă RO î omei, proiecte şi progrme, Editur Meteor Press, Project Mgemet stitute, Guide to te Project mgemet Body of Kowledgw, Svvkis C. S., Mrket lysis d Competitiveess i Project pprisl, 2000, ttp://mpr.ub.ui-muece.de/9796/ 9. Stcu., Fices (Fiţe), Editur Ecoomică, Bucureşti, Stoi M., vestmet Mgemet (Gestiue ivestiţiilor), Editur SE, Bucureşti, Virie L., Trumper M., Project Decisios: Te rt d Sciece, Publiser: Mgemet Cocepts, Zo J G., Sigificce of Risk Qutifictio Te Smrt Decisio-mkig Process, Coferece 2007, ttp://plisde.com. 105