A major project involves a significant amount of investment. The benefits of such a project are numerous. For one, the increased production of goods and services translates to more profits for the company. This will ultimately mean increased revenue for the shareholders, management, and employees. Another benefit is improved market competition. Lastly, an increase in production will enable the company to hire more workers and produce more products or services. All of these benefits come with a price: increased cost and risk.
Another factor to consider when calculating the benefits and risks of a capital investment is the level of uncertainty associated with the project. While oil prices are low, they may rise rapidly in the future. A large coal-fired plant can meet these demands. An oil-fired plant will increase the utility’s output and reduce its cost, but will not necessarily result in the same NPV. If you don’t consider the level of uncertainty in the project, then the investment is a riskier proposition than it appears.
