Risky Investments and Capital Budgeting

Abstract

Financial tasks on a farm have strong links with production, marketing, and consumption. Since production, marketing and consumption decisions are based on expectations which are uncertain, management decisions have to take into account financial risks that might result from such uncertainties. These risks may have more pronounced effect in case of investments which have larger economic life. Thus, adjustments are made in costs or in returns that might accrue from the investment over its economic life to neutralize the effects of such risks. This note discusses the methods to adjust for risks associated with some investments in the capital budgeting analysis.