(Solution) Assignment on Financial Management

Financial Management

Table of Contents
INTRODUCTION...........................................................................................................................3
Question 1: Explaining sensitivity and scenario analysis in the context of capital budgeting
tools..............................................................................................................................................3
Question 2: Explaining similarities and differences between capital asset pricing model and
capital market line........................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Financial management is highly concerned with making optimum use of financial
resources with the aim to fulfill organizational goals and objectives. In the dynamic business
environment company can attain success only when it takes suitable investment decisions by
evaluating all the alternatives. In the business unit, higher management has responsibility to
build competent and strategic financial framework by evaluating market trends. Hence, by
employing several financial tools and techniques business entity can assess the project which
proves to be beneficial for them. In this, the present report will develop understanding about
capital asset pricing model and market line. Further, it will also shed light on the extent to which
capital budgeting tools are linked with sensitivity analysis.
Question 1: Explaining sensitivity and scenario analysis in the context of capital budgeting tools
Sensitivity analysis:
It may be defined as a tool or technique which in turn helps in assessing the extent to
which independent variables have an impact of dependent factors. Hence, by conducting
sensitivity analysis investors can determine the manner in which changes take place in variable
have an impact on outcome (Sensitivity analysis,2017). In this way, by doing sensitivity analysis
relationship between input and output variables can be determined by investors in the best
possible way.
In the present era, sensitivity analysis is conducted by the business organizations with the
aim to make highly effectual corporate decisions. Hence, a decision which is taken on the basis
of sensitivity is closely related with the capita budgeting decisions. Moreover, capital budgeting
may be served as a financial tool or process which in turn helps company in making decision
that whether they need to invest money in certain project or not (Van Horne, 2010). Investment
appraisal techniques help in determining the revenue or profit which will be generated by firm or
investors from several alternative options. In this way, NPV, payback period, IRR and ARR are
the most effectual tools which help in evaluating the viability and profitability of investment
proposals. NPV method of capital budgeting provides deeper insight about the return that will be