The process of allocating financial resources is extremely complex—both because the selection of investments depends on multiple, and interrelated, variables, and constraints that limit the eligibility domain of the solutions, and because the feasibility of projects is influenced by risk factors. In this sense, it is essential to develop economic evaluations on a probabilistic basis. Nevertheless, for the civil engineering sector, the literature emphasizes the centrality of risk management, in order to establish interventions for risk mitigation. On the other hand, few methodologies are available to systematically compare ante and post mitigation design risk, along with the verification of the economic convenience of these actions. The aim of the paper is to demonstrate how these limits can be at least partially overcome by integrating, in the traditional Cost-Benefit Analysis schemes, the As Low as Reasonably Practicable (ALARP) logic. According to it, the risk is tolerable only if it is impossible to reduce it further or if the costs to mitigate it are disproportionate to the benefits obtainable. The research outlines the phases of an innovative protocol for managing investment risks. On the basis of a case study dealing with a project for the recovery and transformation of an ancient medieval village into a widespread-hotel, the novelty of the model consists of the characterization of acceptability and tolerability thresholds of the investment risk, as well as its ability to guarantee the triangular balance between risks, costs and benefits deriving from mitigation options.

https://www.mdpi.com/2071-1050/10/12/4668/pdf

Risk analysis and investment appraisal in marketing

The ALARP Principle in the Cost-Benefit Analysis for the Acceptability of Investment Risk

Estimates of the cash flows that are generated by a proposed capital investment project in each year of its life are, almost invariably, built up from estimates of other variables. For example, in a project involving building a plant to manufacture a new product, the cash flows that are fed into the net present rate (NPV) calculation are likely to be calculated from estimates of such variables as the size of the market, the company's market share, and variable operating costs. The risk in an investment project arises, essentially, from management's uncertainty about these primary variables. This uncertainty gives rise to uncertainty about the cash flow estimates that, in turn, create uncertainty as far as the calculated performance measure is concerned. The chapter presents two analytic procedures for quantifying risk. The first involves carrying out a sensitivity analysis; the second involves carrying out what is known as a risk simulation. The first identifies, in an approximate way, the contribution of each of the primary variables to the overall risk of the project, while the second is an attempt to obtain, directly, a measure of the overall risk.

Risk analysis and investment appraisal in marketing

Citations

The ALARP Principle in the Cost-Benefit Analysis for the Acceptability of Investment Risk

Some procedures for quantifying risk

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