CORPORATE FINANCIAL MANAGEMENT.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
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Author’s Note

CORPORATE FINANCIAL MANAGEMENT1
Introduction
Corporate decision-making process is considered as a crucial aspect in the business
organizations which involved in making crucial decision for different aspects of the
organizations like investment decisions and others. The managements of the companies have
the option to use different types of financial tools for making corporate decisions; sensitivity
analysis, break-even analysis and others. One crucial aspect is that these tools have certain
connections with the aspects of capital budgeting like Internal Rate of Return (IRR) and Net
Present Value (NPV). This is a crucial aspect that the managements of the companies are
required to consider at the time of corporate decision-making. The main aim of this report is
the analysis and evaluation of four concepts; they are Sensitivity Analysis, Scenario Analysis,
Break-even Analysis and Simulation Analysis. After that, this report undertakes the analysis
of the connection of these concepts with the major components of capital budgeting which
are NPV and IRR. It means that this report discusses about the relation of the capital
budgeting concepts with the selected concepts.
a. Sensitivity Analysis
Sensitivity Analysis is considered as a major tool that is used in financial modelling in
order to analyse how the different values of a set of independent variables create impact on a
specific dependent variable under certain specific conditions. In a more specific sense,
sensitivity analysis is considered as a process that the investors use for understanding what
components of the market condition and environmental variables will change their
perspective investments (Finnerty 2013). For instance, this tool is often used by the investors
for testing what variables change the price of stock of a listed company and to what extent.
Investors study the sensitivity analysis through changing one variable at a time and spotting
the following impact. By segregating the variables through the process to eliminate, investors

CORPORATE FINANCIAL MANAGEMENT2
become able in gaining a clear picture of the elements that have effects on the stock prices.
The use of this tool can also be seen in gathering information as well as preparing different
outcome in the presence of incorrect interpretation of data by a special system. It implies that
the sensitivity analysis assists in determining how different values of an independent variable
affect a specific dependent variable in a provided set of assumption. Vast use of this
technique can be seen in the business world as well as in the field of economies (De Grauwe
and Grimaldi 2018).
Now, it needs to be mentioned that sensitivity analysis has a major relation with the
main two components of capital budgeting that are NPV and IRR. The wide use of sensitivity
analysis can be seen in the capital budgeting decisions for assessing how the change in inputs
such as variable costs, sales, fixed costs, cost of capital and marginal tax rate will create an
impact on such outputs as a project’s NPV, IRR and discounted payback period. With the use
of sensitivity analysis, it becomes possible to investigate into the fact that how the projected
performance will differ along with the alterations in the key assumptions on which the
projections of capital projects are grounded (Wu et al. 2014). The NPV of a particular project
is grounded on the series of cash flows along with the discount factor. Both of these
determinants have dependency on large variables like sales, revenue, competition, input cost
and other. In the presence of all of these variable, a series of cash flows will be there along
with the NPV of the proposal. In the presence of the change in any of these variables, there
will be change in the value of NPV. It indicates towards the aspect that sensitivity analysis
helps in measuring the movement in NPV as its value is sensitive to all these variables
(Valickova, Havranek and Horvath 2015).
b. Scenario Analysis
Scenario analysis refers to a process to estimate the a portfolio’s expected value after
a provided period of time while assuming certain changes in the portfolio’s value or the