Firms can explicitly incorporate political risk into the capital budgeting process and adjust project NPV accordingly using budgeting techniques.
Political risk is the possibility that a country's political unrest or changes could have a negative impact on an investment's results. A change in the executive, judicial, legislative, or military branches of government could cause instability that would have an impact on investment returns.
The procedure a company uses to assess potential big projects or investments is called capital budgeting. Before a project is accepted or denied, capital budgeting is necessary. Examples of such projects include the construction of a new plant or a significant investment in a third party enterprise.
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