BUS 5110 Managerial Accounting Discussion Assignment Unit 6: Running Head: (Shortened Title Up To 50 Characters) 1

Running head: [SHORTENED TITLE UP TO 50 CHARACTERS] 1
BUS 5110 Managerial Accounting
Discussion Assignment Unit 6
Yuma Arimura
University of the People

[SHORTENED TITLE UP TO 50 CHARACTERS] 2
Introduction
Three examples of the main risks associated with capital budgeting decisions are provided. Then,
I describe how large and difficult to predict the impact they will have on management.
Risks of capital budgeting
1. Terrorism.
There might be incidents with a major impact on a global scale, such as the September 11 attacks
in USA. The impact on the U.S. economy was devastating: In New York City, about 430,000 job-
months and $2.8 billion in wages were lost in the first three months after the attacks. (Dolfman et
al. 2004)
2. Bubble economy and its collapse
An economic bubble is a situation in which asset prices appear to be based on implausible or
inconsistent views about the future. (Krugman 2013) For example, Japan experienced a bubble
economy between 1986 and 1991. Then, when a bubble economy progresses at a certain level,
the number of buyers of assets will outnumber the number of sellers, and asset prices will begin
to fall. Investors and financial institutions will sell their assets at once, and asset prices will
plummet. Eventually it leads to bursting of the bubble. (Wikipedia n.d.)
3. world-wide infectious diseases
The ongoing outbreak of COVID-19 is an example. The Asian Development Bank estimates that
the spread could cause a loss of up to $8.8 trillion to the global economy. (NIKKEI 2020)
Effect of the risks on economy
In those situations, demand would fall sharply. As a result, it is often impossible to obtain the
return originally expected for the capital investment.
As for the COVID-19, for example, Australian aviation giant Virgin has collapsed. (Angus 2020)
The main factor was a sharp decline in global demand for aviation within a few months. In the
industry, an aircraft itself requires a large investment, but this rapid evaporation of demand is
beyond the assumptions.
On the other hand, the aviation industry has been expanding globally recently if the COVID-19
effect is excluded: while global economic growth in 2019-2038 was projected at an average
annual rate of 2.8% in GDP, air passenger demand grew at an average annual rate of 4.4%.
(Japan Aircraft Development Corp., 2019) With such rapid demand growth expected, a passive
investment would have made it difficult to compete. In other words, it would have been difficult
to decide to withdraw from the investment.
Conclusion
As you can see above, a sudden change in demand will have a huge impact on the companies.
The more drastic such changes are, the more difficult they are to predict. It may be necessary to
structure the business portfolio based on the assumption that such risks will always exist.
References
Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved
from https://2012books.lardbucket.org/books/accounting-for-managers/index.html
Dolfman, Michael L.; Wasser, Solidelle F. (2004). "9/11 and the New York City
Economy". Monthly Labor Review. 127.
Makinen, Gail (September 27, 2002). The Economic Effects of 9/11: A Retrospective

Assessment. Retrieved from https://fas.org/irp/crs/RL31617.pdf
Krugman, Paul (9 May 2013). "Bernanke, Blower of Bubbles?". The New York Times.

Retrieved from https://www.nytimes.com/2013/05/10/opinion/krugman-bernanke-blower-of-
bubbles.html?src=me&ref=general
Wikipedia (n.d.). バブル景気. Retrieved from

https://ja.wikipedia.org/wiki/%E3%83%90%E3%83%96%E3%83%AB%E6%99%AF
%E6%B0%97
NIKKEI (2020).世界経済、最大 940 兆円損失アジア開銀試算. Retrieved from

https://www.nikkei.com/article/DGXMZO59136760V10C20A5EAF000/
Angus Whitley (2020). Virgin Australia Collapses as Virus Wipes Out Global Air Travel.
Retrieved from https://www.bloomberg.com/news/articles/2020-04-20/virgin-australia-collapses-
as-airline-calls-in-administrators-k992yqn6
Japan Aircraft Development Corp. (2019).民間航空機に関する市場予測. Retrieved from
http://www.jadc.jp/files/topics/143_ext_01_0.pdf

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