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Infrastructure Project Finance

Risk Assessment

Mona Iyer
Faculty, School of Planning
CEPT University
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
• 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
• 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
• 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
– 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