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Risk Assessment in Infrastructure Finance

This document discusses various risk assessment methods for infrastructure project finance, including conventional methods like payback period, risk-adjusted discount rate, and certainty coefficient. It then focuses on sensitivity analysis, scenario analysis, and statistical techniques. Sensitivity analysis identifies important variables, simulates forecasts by changing variables, and examines how sensitive project NPV and IRR are to each variable. Scenario analysis considers interrelationships between variables without calculations. Statistical techniques assign subjective probabilities to optimistic, expected, and pessimistic cash flow scenarios.

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Saurabh Suman
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32 views7 pages

Risk Assessment in Infrastructure Finance

This document discusses various risk assessment methods for infrastructure project finance, including conventional methods like payback period, risk-adjusted discount rate, and certainty coefficient. It then focuses on sensitivity analysis, scenario analysis, and statistical techniques. Sensitivity analysis identifies important variables, simulates forecasts by changing variables, and examines how sensitive project NPV and IRR are to each variable. Scenario analysis considers interrelationships between variables without calculations. Statistical techniques assign subjective probabilities to optimistic, expected, and pessimistic cash flow scenarios.

Uploaded by

Saurabh Suman
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Infrastructure Project Finance

Risk Assessment

Mona Iyer
Faculty, School of Planning
CEPT University
Ahmedabad
Risk Assessment
• Conventional Methods
– Pay Back
– Risk Adjusted Discount Rate
– Certainty Coefficient
• Sensitivity Analysis
• Scenario Analysis
• Statistical Methods
Sensitivity Analysis
• Forecasted cashflows depend on expected
revenues and costs
• Revenue
– function of various variables eg. Road project- volume
of traffic, toll rates, project duration
– Also, traffic is likely to depend on overall development
of region and importance of particular road over time.
• Cost
– generally function of variable unit rates
• Reliability of project NPV and IRR depends on
reliability of variables
Sensitivity Analysis
• Identify the important variables
• Simulate forecasts by changing one variable at a
time at least for three values i.e pessimistic, expected
and optimistic
• Recalculate/simulate NPV, IRR
• This method of recalculating /simulating NPV, IRR
is called sensitivity analysis
• Gives an idea about sensitivity of project
(investment and returns ) towards given variable
• Higher sensitivity indicates more critical variable
• Thus this method examines sensitivity of project to
particular variable rather than quantifying risks
Sensitivity Analysis
Pros:
• Forces the decision maker to identify all possible variables
that affect project revenues and costs.
• Indicates the critical variables for which the decision maker
should seek additional information and be more careful
• Guides the decision maker to concentrate on relevant
variables
Cons:
• Optimistic and pessimistic may have different meaning for
different group of people/decision makers
• Does not focus precisely on interrelationship between
variables (assumes that variables are almost independent)
Scenario Analysis
• Considers the interrelationship of variables
(generally without any mathematical
calculations.)
• Helps to analyze the impact of combination
of variables
Statistical Techniques
• Probability
– Objective probability: Based on observation of past
data and trends, repetitive occurrence over period of
time
– Investment decision do not have trends to follow and
are non-repetitive
– Hence subjective probability -Personal opinion about
likelihood of the event to occur
– Generally assigning probability to optimistic, expected
and pessimistic CASHFLOWS/scenario cashflows

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