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An answer,
1.Through analysing the payback period
-Investors should access the time it takes for an investment to pay back the amount of money
invested.
-Investors set a time limit when they expect to receive returns and if the returns fails to be
recognised beyond the time limit,the investment is considered to be risky and should be avoided.
2.Through using certainity equivalent
-Cerainity equivalent is a factor that determines the risk associated with future cashflows.
-To avoid uncertainty,the investors should convert expected future cashflows into certain
cashflows.
-Risky investments have low certainty equivalent rating and therefore should be avoided.
3.Through sensitivity analysis
-Return on investments may be affected by factors such as sales,cost of sales and tax rates.
-Sensitivity analysis tries to evaluate the extent to which the projects cashflows change in
response to any of those factors.
-If projected cashflows are sensitive to these changes, they are considered much risky and should
be avoided.
4.Through risk premium
-Investors try to invest their funds into risky projects and therefore the returns from such
investments should be higher than the returns from less risky investments such as treasury bonds.
-Risk premium is a discount rate that is added to the risk free rate of borrowings to be invested.
-The investments are appraised using the resulting discount rates and the investments that offer
higher returns are chosen.
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