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Forecasting Risk

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1. Forecasting Risk

Risks, which are understood as either as potential hazard or opportunities related to the project, can be differentiated into two categories: Financial Risks and Operating Risks (Ross, Westerfield, & Jordan, 2009, 98).  Financial Risks may refer to ability of the company to afford the order entry system and what kind of financial impact the purchase of the system will have.  Operating risks are related to exploitation of the system including the potential benefits and threats posed by its launch and maintenance.

2. Operating Leverage

This factor reflects the potential benefits from the new system. For example the new system may make it faster to submit and process he order and thus increase the number of the orders received by the company and directly impact the profit. On the other hand the launch of the new system incurs additional costs, apart from $840,000 of the system costs, like training of the staff, maintenance, etc. Thus the new system should return the expenses (Ross, Westerfield, & Jordan, 2009, 370).

3. Break - Even

Break-even appears when the project doesn’t bring any profit; either it incurs losses. Break-even point is another factor that reflects the cost-effectiveness of the project. The new system launch should reach the break-even point as soon as possible in order to be worth the expenses.

4. Stock vs. Gambling

The new system of order entry should go along with the existing systems like inventory management, for example. In light of the purchase of the computer system for order entry it is imperative for the effective management of stock to have a structured mechanism for maintaining inventory. If the stocks are to be maintained on any modern developed Japanese technique like just in time management then care has to be taken that stocks are properly planned rather than just betting on stocks to be managed effectively without proper prior planning and without a proper automated system.

5. Project Evaluation

In order to evaluate the entire project a number of factors need to be taken into account. This is an imperative in the initial stage of the project implementation. There are a number of techniques applied to evaluating the project in the initial stage. They allow predicting roughly the performance of the project. Among the criteria used are: Appraisal techniques might include the following: Net present value (NPV), Internal rate of return (IRR), Modified internal rate of return (MIRR), Payback period / discounted payback period, McCauley’s Duration, and other parameters. These parameters are calculated before the launch of the project and primarily influence investment decision making (Ross, Westerfield, & Jordan, 2009, 420). The launch of the new computer-based entry system will incur the immediate cash outflow of $840,000 with increasing expenses. But NPV and IRR factors may help to evaluate the profitability of this project and forecast the return of the expenses what is very important especially in case if the company needs the help of the investors to afford the project. Project evaluation serves primarily for evaluating a long term benefits of the new system and compare the expenses with possible reductions in costs achieved with the help of the system.

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