FIN200 Corporate Financial Accounting
Added on 2020-02-24
12 Pages2788 Words55 Views
Running Head: Corporate Financial Accounting 1Project Report: Corporate Financial Accounting
Corporate Financial Accounting 2ContentsIntroduction.......................................................................................................................3Sensitivity analysis...........................................................................................................3Scenario analysis..............................................................................................................5Break even analysis..........................................................................................................7Simulation techniques.......................................................................................................8Conclusion........................................................................................................................9References.......................................................................................................................11
Corporate Financial Accounting 3Introduction:Capital budgeting is a part of investment appraisal techniques. This planning process is used by the companies to evaluate the various investment long term opportunities. Capital budgeting process evaluates the various projects according their cash flows, present value factors, their net present value, internal rate of return, payback period, accounting rate of return etc (Zimmerman and Yahya-Zadeh, 2011). long term investment opportunities for a business could be new products, new plants, replacement of old machineries, new machinery,research development projects etc. for analyzing the best project, company takes the help of various tools which are available such as sensitivity analysis, scenario analysis, break even analysis, simulation technique analysis (Bierman and Smidt, 2012). It is required for every organization to evaluate the best investment proposal from the available proposals. And this could only be possible if the best corporate decision strategies have been adopted by the company. Corporate decision making is a process which aids the organization into looking over various aspects and then makes a best decision for every dilemma of the business. Corporate decision making is a continuums process which takes place at every step in an organization. Corporate decision making sets a companionship among all the factors of the company and the stakeholders of the company (Gervais, Heaton and Odean, 2011). This report tells the user about various techniques and analysis which would aid the organization to select the bestinvestment proposal according to the requirement of the company. Sensitivity analysis:Sensitivity analysis is a tool which is used by the various parties to evaluate that how many diversified values of a free variable would affect a specific variable which has been estimated through many assumptions. This analysis is also known as “what if” analysis. It has
Corporate Financial Accounting 4been observed that normally, every entire quantitative factor of an investment such as cash outflow, cash inflow, discount rate, cost of capital, project duration etc are recognized with certainty but in reality, it rarely takes place (Bierman and Smidt, 2012). Sensitivity analysis helps the companies to overcome the same problem. The techniques of sensitivity analysis could be applied over various planning activities and not only on capital budgeting decision. This analysis helps an organization into evaluating that how the distribution of possible internal rate of return and net present value for a proposal under context is impacted consequently to make a change into a single variable which is dependent in nature. This analysis could take place only be changing into one variable at a time. Sensitivity analysis evaluates a value for every input and offers a decision making process to the company to choose the best project. Such as if a product’s selling price would be reduced by 10% and at the same time, the internal rate of return would also be changed due to changes into the total life of the project from 3 years to 5 years. Than sensitivity analysis, helps the organization to make a better decision about investment (Bennouna, Meredith and Marchant, 2010). As according to the above case, every factor will be changed due to change into a single variable of the investment proposal. Such as changes into the selling price will change the NPV of the project and the total life of the project will make an impact over the internal rate of return. Than the calculated NPV is plotted into a graph to depict that how sensitive thenet present value could be due to changes into the related factors. The below figure depict that the slope of line in the below graph depicts that how sensitive the net present value is to make a change into each input. The steeper the slope would be, the more sensitive the net present value would be to make changes into the variable.
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