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STUST-GMBA JAVZMAA GANBAATAR MA3N0223 What is the finances fundamental idea? Risk Return The probability of loss inherent in financing methods which may impair the ability to provide adequate return. Thus risks result from a variety of factors including uncertainly about future revenues, expenditures and taxes. Also risk results almost entirely from the uncertainty about future cash inflows, because the initial cash outflow is generally known. The planning process used to determine whether an organization's long term investments, such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. + The risk that can arise here involves the potential that a chosen action or activity (including the choice of inaction) will lead to a loss. = RISK IN CAPITAL BUDGETING Sensitivity analysis Scenario analysis Breakeven analysis NPV - Net Present Value CF -Annual Cash Flow PVIFA - Present Value of the Interest payment Factors annuity - State Farm and its policyholders disputed whether some of the damage was caused by wind, which is covered under the homeowner’s policy, or flooding, which is not covered under the policy. - About 2 percent of the State Farm claims associated with the Hurricane Katrina had not been settled as of early 2007. - So a number of lawsuits were filed to try to force State Farm to pay more than State Farm adjusters deemed appropriate. - State Farm announced that it would suspend writing new homeowners and commercial property insurance in Mississippi. - State Farm Senior Vice President Bob Tipp said that “ We will continue to serve our existing policyholders, write new auto insurance policies and market our financial services products as long as market conditions allow, but the current legal and business environments with regard to homeowner and commercial insurance are becoming untenable ” State Farm’s primary concern is that provisions in its insurance policies are being reinterpreted after the fact-through lawsuits-to provide for coverage's that were not contemplated when the policies were written. The state of Mississippi has considered legislation that would require State Farm to continue to issue new policies. But all companies face a variety of risks as they conduct their daily business. Each company must assess the risks of conducting its current business and the risks associated with new projects.