Risk Analysis in Capital Investment

Of all the decisions that business executives must make, none is more challenging—and none has received more attention—than choosing among alternative capital investment opportunities. What makes this kind of decision so demanding, of course, is not the problem of projecting return on investment under any given set of assumptions. The difficulty is in the assumptions and in their impact. Each assumption involves its own degree—often a high degree—of uncertainty; and, taken together, these combined uncertainties can multiply into a total uncertainty of critical proportions. This is where the element of risk enters, and it is in the evaluation of risk that the executive has been able to get little help from currently available tools and techniques.