UNPROFITABILITY RISK ANALYSIS OF MULTI-PRODUCT MANUFACTURING PROJECTS UNDER DIFFERENT LEVELS OF UNCERTAINTY

Abstract

The article is dedicated to the development of dynamic break-even analysis for investment projects under uncertainty. A new approach to comparing the risks of unprofitability of multi-product manufacturing projects is proposed. Relative break-even margins serve as the measure for comparing risks of unprofitability: the smaller the margin, the greater the risk. For projects with a rental cash flow, the proposed approach allows for comparing project risks of unprofitability for their key parameters and ranking the parameters in descending order of risk. For projects with an arbitrary cash flow, integral risks of unprofitability can be compared. Two levels of uncertainty are considered: a high-certainty level, where the projected cash flow payment values are known with a probability close to one, and a level of partial uncertainty, where there are several possible scenarios for the project's cash flow with varying probabilities of implementation. In the latter case, project risks of unprofitability are assessed based on the expected values of the corresponding relative break-even margins. When assessing a project's risk of unprofitability for any parameter of its rental flow using the relative break-even margin, the actual value of the parameter is compared with the project's dynamic break-even point for this parameter. When assessing the project's integral risk of unprofitability, the actual value of the project efficiency indicator is compared with its break-even value. To assess the integral risk of unprofitability, it is most convenient to use the relative break-even margin based on the PI indicator—the project profitability index, which coincides with the project's safety limit when assessing its payment amounts. The approach proposed by the authors expands the capabilities of two traditional methods of project risk analysis: sensitivity analysis and the scenario method. Sensitivity analysis (in the authors' own unique interpretation) for the first time applied in situations of partial uncertainty, while the scenario method conducts a sensitivity analysis for each scenario. This combination allows the scenario method to compare project unprofitability risks for its parameters, rather than simply assessing the integral risk of unprofitability of the project as a whole. The practical application of the developed methodology is illustrated by four examples for different levels of uncertainty and different structure of project payments.