Corporate Financial Management Techniques: Sensitivity, Scenario, Break-even and Simulation Analysis

This report discusses the four techniques of corporate financial management: sensitivity analysis, scenario analysis, break-even analysis, and simulation analysis. It explains how these techniques can be used to make effective decisions and improve business performance. The report also provides a detailed explanation of each technique and its benefits.

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Corporate financial management

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Table of Contents
Introduction......................................................................................................................................3
a. Sensitivity analysis.......................................................................................................................3
b. Scenario analysis..........................................................................................................................5
c. Break-even analysis.....................................................................................................................5
d. Simulation analysis......................................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
The business requires the use of various techniques y the help of which there will be an
undertaking of the best decisions. There is the need to have an understanding of the tools so that
they can be used in an effective manner and advantages can be attained from them. The four
techniques which will be used in this are breakeven analysis, simulation, sensitivity analysis, and
scenario analysis. With the help of them it will be possible to make effective decisions and the
performance of the business will be improved. The proper discussion of all the techniques is
carried in this report by which appropriate understanding will be gained.
a. Sensitivity analysis
In all the businesses there are certain investments which are required to be made and for that,
there are several options which are available. It is required that they all shall be analyzed in an
effective manner by which the best among them can be selected. This will be done with the help
of available approaches such as capital budgeting. It is the process in which the evaluation of the
available investments is made and then the one which will provide the company with the best
returns is taken into consideration (Herman and Usher, 2017). For this there are various
techniques which are available and can be applied. They will be used and by the help of that net
return which will be available from the investment will be evaluated. One of such method which
will be used is sensitivity analysis. This is the technique in which there are various variables
which are involved and the impact of all will be tested in an adequate manner. The variable in
the business changes with time and requirements and it is necessary that their impact on the
business shall be evaluated appropriately.
For the determination of the impact which will be made with the change there will be the
calculation of the net present value of all the aspects which are available. This is done because
NPV is the main result which is obtained by any project after considering all the expenses and
other elements (Baio and Dawid, 2015). For the undertaking of the sensitivity analysis there will
be determination of the net present value at various changes which will be made in the net
present value. All of the results will then be compared and the deviation which has taken place
from the original elements will be calculated. The change in the net present value together with

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the change in the variable will be compared with each other. By the help of this the most
sensitive variable will be identified and the risk associated with the same will also be taken into
consideration.
By the help of this business will be able to take the correct decision and in that process, both the
risk and return associated with that project will be taken into account. There are certain variables
and changes which will be affecting the business in a negative manner and all of them will be
identified with the help of this technique (Yu et al., 2014). The project will be successful when
the correct decision will be made and this will be possible with undertaking of the correct
procedure. There is the fixed process which is required to be followed under the sensitivity
analysis and so it is required that the users shall have complete understanding of the same. All of
the steps shall be followed in such manner that there is the new target which is attained and
business will be able to maintain the required level of profits. In the calculations which will be
made there will be inclusion of all the changes that are taking place and by that required
deviation will be identified in an accurate manner. The correct level of the sensitivity which is
maintained will be made available. By the help of that it will be possible for the management to
take the effective steps and that will be helping them to safeguard the business from the adverse
impacts which are made.
The situations which will be arising in the coming period will be analyzed in advance and that
will be helping the company to take the steps in advance by which the adverse impacts will be
eliminated. The losses which would have been faced otherwise will be avoided and there will be
saving of the amount which will be used in some other places so that the required targets can be
attained (Rodríguez et al., 2013). There will be many assumptions which will be made under this
and all will have to be taken into consideration in an appropriate manner. There are various
adverse results which are involved and they will be identified with the help of the determination
of the risks and uncertainty that is involved in the business. There will be proper process which
will be taken to eliminate the risk involved and by that the results will be improved. There will
be making of the forecasts with the help of which the performance in the coming period will be
improved. There will be forecasts which will be made and will have to be followed by all so that
the targets can be attained.

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b. Scenario analysis.
The decision making is an important aspect of the business and in the same, there is the need to
use the available techniques. There is the scenario analysis which will be performed and in that
there will be consideration of the various situations which will be resulting in the best and worst
results (Hao et al., 2015). There will be consideration of them and the results which will be
obtained with the help of them will be identified and analyzed in an effective manner (Slegers et
al., 2013). There will be collection of all the information which will be required in the decision
making and in the process of carrying out the evaluation. The projects and the arising
circumstances in relation to that will be analyzed.
In order to handle all of such situations, there will be use of the scenario analysis which will be
considering all of the situations that exist in the business. The situations arise more than once and
so it is required that their frequency shall be determined (Qu and Meng, 2012). The risk which is
involved in the processes and the project will be taken into account and there will be
consideration of the reasons which are responsible for them. All of them will be identified and
there will be consideration of them in the coming period. By the help of this their occurrence in
the future will be avoided and all the losses which may have arisen in that will be eliminated.
The consideration of all the problems will be made in advance and this will be the gain for the
business as there will be no negative impact which will be made.
c. Break-even analysis.
The sales of the company are the main aspect which decides the amount of the profit which will
be made by the company. In order to maintain adequate income, there is the need to identify the
quantity which will have to be sold. This will be done with the help of the adequate technique
and the same will be breakeven analysis. For the maintenance of the profits it is required that the
cost which is incurred in the project shall be controlled and this will be done with the help of
undertaking of the proper measures (Landers et al., 2012). There is the classification of the cost
which will have to be identified as in that there are two components which are involved and they
are variable and fixed cost. The amount which is incurred as the variable will be changing with
the change in the quantity that is sold and the fixed cost will remain constant. Due to this it can
be said that the profits will be affected by the change in the variable cost.

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This will be analyzed with the help of breakeven analysis in which the units at which the
company will be in the situation of nil profits or loss will be identified (Goldenberg et al., 2015).
There will be consideration of the fixed cost and the point at which the same will be recovered
will be considered as the breakeven sales. For the calculation of the same there will be
ascertainment of the contribution which is made on each unit. This will be done by deducting the
variable cost from the sale value and then the result will be divided with the fixed cost (Bozat et
al., 2014). This will be provided with the sales that are the minimum level to be attained to
recover the cost. After this point of sale the company will start to earn the profits which are the
main aim of the business.
The breakeven point will be identified and then the further decisions in relation to the sales will
be taken in accordance with the same. By the use of this, the situation of making the loss will be
avoided and company will be making the required earnings.
d. Simulation analysis
Simulation is the main technique which is used for the analyzation of the business proposals.
There is a situation in which the sparse data will be there and so the uncertainty is involved and
they will be dealt with by the company by taking into consideration the simulation technique.
The information that is available for the evaluation is limited and due to that there are various
issues which are faced and company needs to take them into account (Dartanto, 2013). The
company will be using the available data only and with that the analyzation will be made which
is most important. In that there are no clear instructions and because of the same the use of trial
and error method is made.
All of the situations which may arise are taken into account an then the trial and error method
with the help of available data is made. The point which will be appropriate will be determined
with the help of that. There is the need to identify the level of the priority in relation to all the
operations which are to be performed. There are many tasks and the company does not have the
time and resources by which all of them can be performed at the same time (Nannicini, 2007).
The most prior ones will be identified and then the working will be made in such manner that
they are completed in the most effective manner. By the use of this, the chances of making the
gain will be increased as the most profitable projects will be taken on priority. The decision will

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be made in such manner that the profits of the company are maximized. The random selection
will be made in this and there will be probability which is assigned to all the available options.
There will be testing of all and the one which is most beneficial is considered to be undertaken.
Conclusion
The capital budgeting is the important requirement of the business and the same has been
undertaken in the given report. There has been the identification of the various techniques which
can be used by the business in the process of evaluation of various projects. The company will be
required to follow any of them and for that, an understanding of all has been given. The manner
in which profits of the business will be increased with the help of them has been identified. There
are various steps which will be required to be undertaken in them and all of them have been
identified and explained so that they can be used by the business. The main techniques which
have been covered include the breakeven analysis, simulation, sensitivity analysis, and scenario
analysis. By the use of the business will be able to attain the required results and there will be an
increase in the profitability.

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References
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multichamber bags versus compounded parenteral nutrition: breakeven point. Hospital
pharmacy, 49(2), pp.170-176.
Dartanto, T. (2013) Reducing fuel subsidies and the implication on fiscal balance and poverty in
Indonesia: A simulation analysis. Energy Policy, 58, pp.117-134.
Goldenberg, S.D., Bacelar, M., Brazier, P., Bisnauthsing, K. and Edgeworth, J.D. (2015) A cost-
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Herman, J.D. and Usher, W. (2017) SALib: An open-source Python library for Sensitivity
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Nannicini, T. (2007) Simulation-based sensitivity analysis for matching estimators. The stata
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Rodríguez, G.C., Andrés, A.C., Muñoz, F.D., López, J.M.C. and Zhang, Y. (2013) Uncertainties
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