Methods of Incorporating Risk Factors in Capital Budgeting Decisions

The methods can be put into following two general classes : 

1. Those that operate without considering risk profile in detail. These are also called common or general techniques. 
2. Those that operate with considering the risk profile in detail. 

Under Method (1) 

There are two approaches : 

• Risk-Adjusted Discount Rate Approach; and 
• Certainty-Equivalent Approach. 

Under Method (2) 

Also called quantitative methods, there are three types of analyses here under : 

• Sensitivity Analysis (also called "what if' analysis); 
• Analysis through Measures of Risk (Standard Deviation and Coefficient of Variation) based on Probability Distribution; and 
• Analysis based on Decision-Tree. [Really speaking, Decision-Tree analysis is a sub-class under Probability Distribution-based Approach.]