Money risks

Money does not hold the same value for each company or each individual. A dollar may keep a pauper from starvation while being a trivial amount to the person who gave it. Attempts have been made to quantify a company s attitude to money, risk, and uncertainty by asking business executives a number of questions such as the following ... 

What gets far less comment is that most of the problems all came from a larger, systemic problem the owners and operators of steamships had for five decades taken larger and larger risks to save money—risks to which they had methodically blinded themselves. The Titanic disaster suddenly ripped away the blindfolds and changed dozens of attitudes, practices, and standards almost literally overnight. 

Reliability. Certain controls are only effective if carefiiUy maintained. Whereas a substitution, if appropriately selected, may need monitoring, a control that depends on a sensor operating an alarm may cease to work after it is installed if it is not carefiiUy checked, caUbrated, and repaired. This procedure costs money, time, and supervisory effort, and increases risk. 

The design or substantial modification of a new plant or process, its subsequent constmction, and start-up represent a tremendous investment of time and money. The rewards are great if a significant improvement is realized the risks are also great if a costiy commercial plant fails to produce as expected. To reduce the degree of risk, lengthy and expensive research programs are often undertaken. 

Time Value of Money A large part of business activity is based on money that can be loaned or Borrowed. When money is loaned, there is always a risk that it may not be returned. A sum of money called interest is the inducement offered to make the risk acceptable. When money is borrowed, interest is paid for the use of the money over a period of time. Conversely, when money is loaned, interest is received. 

The cost of capital may also be considered as the interest rate at which money can be invested instead of putting it at risk in a manufacturing process. Let us consider the process data listed in Table 9-4 and plotted in Fig. 9-10. If the cost oi capital is 10 percent, then the appropriate discounted-cash-flow curve in Fig. 9-10 is abcdef. Up to point e, or 8.49 years, the capital is at risk. Point e is the discounted breakeven point (DEEP). At this point, the manufacturing process... 

A company may be considering a project with a very high potential rate of return and a low risk, but it may prove impossible to raise the money to start the project. Conversely, the company may be prepared to undertake an extremely risky project if the investment is trivial. Thus, the attitude of a company to risk depends on the circumstances. 

The same questions may then be asked for different values of the probabilities p and po. The answers to these questions can give an indication of the importance to the company of P at various levels of risk and are used to plot the utility curve in Fig. 9-25. Positive values are the amounts of money that the company would accept in order to forgo participation. Negative values are the amounts the company woiild pay in order to avoid participation. Only when the utihty value and the expected value (i.e., the straight line in Fig. 9-25) are the same can net present value (NPV) and discounted-cash-flow rate of return (DCFRR) be justified as investment criteria. 

R. O. Swalm [ Utility Theory—Insight into Risk Taking, Hai v. Bus. Rev., 44, 123-136 (November-December 1966)] found that many business executives had difficulty in appreciating fine shades of odds and confined his considerations to even-money bets. He asked various executives to state what guaranteed sum of money they considered equivalent to a gamble related to the toss of a coin. If the coin fell on one side, they would win a given sum of money if the coin fell on the other side, they would get nothing. 

As has been stated, it is alternatively possible to assign to the cost of capital the best risk-free return available on the money. The assessment then proceeds as discussed in connection with Eq. (9-108). 

Banks are not in business to take risks. They rent money and do everything they can to insure the return of their principal as well as the interest. Elaborate rating systems have been developed to measure each company s ability to repay its loans. One criterion is the debt to equity ratio. The higher the debt the more risk in a loan, and the higher the interest rate. 

REASONABLY PRACTICABLE Thc implication that the quantum of risk is balanced against the sacrifice or cost in terms of money, time and trouble necessary to avert that risk. If the risk outweighs the sacrifice or cost, additional precautions are necessary. 

The use of the risk-based decision making process allows for efficient allocation of limited resources, such as time, money, regulatory oversight, and qualified professionals. Advantages of using tliis process include ... 

During the implementation of the improvement, money is spent, and debt is incurred, offset by operating margin as it improves. Interest is paid at intervals on the outstanding balance, and after a suitable payback time—which is shorter, the better the improvement—all the debt is recovered, and a better operation is running. This graph then gives three crucial pieces of information, viz. (a) the maximum risk in the form of new... 

In the near future new drugs for the treatment of Alzheimer s disease are expected to be licensed, and it would be extremely valuable to be able to compare them in a clear and well-defined framework. In addition, if economic evaluation is to inform health and social care providers and policy-makers about the potential impact of new interventions in practice, estimation of the value for money of these new interventions requires consideration of (a) the perceived and objective risks and benefits of care (b) attitudes of people with... 

Cost-benefit analysis also requires a determination of the costs incurred from incident-related fatalities. Reduction in individual risk (fatalities per year) is a key component in risk associated with buildings in process plants. One method of determining the cost of fatal accidents is to estimate the amount of money that society might perceive as reasonable compensation in the event of a fatal accident. 

If the loss can be measured in money, the cash value of the risk can be compared with the cost of safety equipment or design changes to reduce the risk. In this way, decisions on safety can be made in the same way as other design decisions to give the best return of the money invested. 

The problem with all such ideas is that they are only ideas. Before they can be tuned into real possibilities, considerable R. D. would have to be undertaken, perhaps lasting 10+ years. If successful, which of course cannot be guaranteed, commercially sized demonstration units would have to be built and operated satisfactorily before the generating industry would be Willing to take the risk of investing in these developments. All this implies that with the possible exception of the modular HTGR, it may be 20.years or more before the first commercial plants come into operation We may well have the time, but ways will have to be found to find the money. 

The buyer adapts his process so he can use the first producer s products. He is not prone to switch unless the technical service department of the new manufacturer can convince him that it will save hhn money and that there are no risks involved. The fire extinguisher example given previously illustrates why the buyer is not eager to change. 

In 1969 this money could be placed in a savings and loan association where it would earn 5.25% interest compounded annually, with the principal guaranteed by the federal government. There is no risk in this investment. At the end of the first year the interest would be... 

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