Investment Decision Analysis Techniques

FIN200 Assignment 1
FIN200 ASSIGNMENT
Student’s Name
Course
Lecturer
Institution
Date

FIN200 Assignment 2
FIN200 Assignment
Introduction
Preparing and identifying probable detrimental occasions that could impact core business
initiative or projects is imperative (Kew & Watson 2010). This calls for better risk analysis
techniques that could provide actionable information regarding specific long-term
investments as well as knowledge that organisations could exploit towards significant
decision-making aspects. While computing whether given long-term investments are
worthwhile the risk, risk analysis is very significant. Therefore, before one invest in new
projects, an individual is required too arm him or herself with crucial insight and to carry out
professional risk analysis in weighing their capital budgeting forecast (Shapiro 2009). With
these considerations, to assist a given company manage different risks; the management
could carry out different types of the risk analysis technique based on investment scenario
and relevancy of specific necessary risk assessment parameters. As a result this paper aims to
present analysis of different risk analysis techniques; that is, scenario analysis, sensitivity
analysis, simulation analysis as well as break-even analysis that could help the company
management in their capital budgeting decision-making.
Sensitivity analysis
Sensitivity analysis is a capital investment technique utilized in determining how diverse
prices of an independent variable upset definite dependent variables under particular norms
(De Kok, Van Donselaar & van Woensel 2008). Basically, sensitivity analysis is a mutual
constituent of an investment appraisal or review which forms a portion of quick risk analysis
and look forward to improving an investment appraisal and formulation by detecting the chief
sources of the uncertainty (Bock & Trück 2011). To be more specific, sensitivity analysis
comprises of analysis of impacts of variations in costs, sales and so forth on a given
investment project. Furthermore, sensitivity analysis is that means or approach of analysing
variation in an investment project’s IRR or NPV for a provided variation in one of its
variables. This shows or displays how sensitive an investment’s IRR and NPV is to variation
in specific variables as shown in Figure 1 below;
Figure 1: Sensitivity analysis input

FIN200 Assignment 3
Source: De Kok, Van Donselaar & van Woensel (2008)
Sensitivity analysis is that explanation of probable cash returns as well as return on a given
investment when one indeterminate component is altered (De Kok, Van Donselaar & van
Woensel 2008). It illustrates the impacts of variations in the assumptions. This technique
utilizes numerous scenario probabilities in modelling a wide range of the probable results in
assessing alternative business decisions. It also permits organizations in determining the
effect of the risks and outcomes in a given investment project. Sensitivity analysis is said to
demonstrate model output variations in accordance with the model input changes as shown in
Figure 2 below. Here, a model regarded as the sensitive model with respect to the input if
adjusting variable input modifies model output (Bujoreanu 2011). Furthermore, in sensitivity
analysis, mathematical model could outlined with assistance of several input components,
variable quantities, set of equations as well as other parameters, which are targeted in
describing procedures being utilized.
Figure 2: sensitivity analysis model output