FIN200 Corporate Financial Management Assignment
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FIN200 Assignment - Corporate Financial Management (FIN200)
Added on 2020-02-19
FIN200 Corporate Financial Management Assignment
FIN200 Assignment - Corporate Financial Management (FIN200)
Added on 2020-02-19
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Running head: FINANCIAL ACCOUNTING Financial AccountingName of the StudentName of the UniversityAuthors NoteCourse ID
1FINANCIAL ACCOUNTINGTable of ContentsIntroduction:...............................................................................................................................2Relation of Capital Budgeting in Sensitivity Analysis..............................................................2Relation of Capital Budgeting in Scenario Analysis:................................................................3Relation of Capital Budgeting in Break Even Analysis:............................................................5Relation of Capital Budgeting in Simulation Analysis:.............................................................6Conclusion:................................................................................................................................7Reference list:.............................................................................................................................9
2FINANCIAL ACCOUNTINGIntroduction: Every project has certain kind of uncertainty and the managers of the corporate firmsare required to determining how risk affects the process of decision-making (Burns andWalker 2015). Large companies regularly uses the difficult method of incorporating risk intothe capital budgeting. However, every manager is required to understand the certaintechniques for assessing the uncertainty. The primary obligations of the corporate managersare to maximise the wealth of the owners but at the same time insuring them from theunwanted risks. Relation of Capital Budgeting in Sensitivity AnalysisOne of the techniques of determining risk is the sensitivity analysis that will help inindicating the change in NPV concerning the given change of an input variable whereas onthe other hand other things remaining constant. For the purpose of sensitivity analysis,application managers need to determine the base value of input variables (Hise and Strawser2013). The base value symbolizes the most probable values and that the corporate manager isanticipating occurring. When the base values are determined then it is necessary to test the net present valueof cash flow sensitivity based on the variable variation concerning few percentage or the fewunits that holds the other variable constant. It is noteworthy to denote that the values must bechanged under the correlation such as cost and the number of products sold. Arguably,sensitivity analysis helps in demonstrating the impacts of changes in the assumptions(Mukherjee and Rahahleh 2013). It is worth mentioning that sensitivity analysis helps inundertaking numerous capital budgeting decision. Sensitivity analysis helps the managers inascertaining how the distribution of possible NPV or the internal rate of return for a project
3FINANCIAL ACCOUNTINGthat is under the considerations is impacted by the consequent changes in one particular inputvariables. Any time managers undertaking the decision of the capital budgeting they arerequired to make assumptions concerning the project such as the number of units for sales,time involved in completing the project and the amount of cost of capital involved. The managers are required to understand the reliability of the assumptions and theanticipated change in the result of the project if the managers make wrongs assumptions.Sensitivity analysis can be regarded as the method of measuring the sensitivity of the resultsthat is involved in the assumptions of the project (Andor Mohanty and Toth 2015).Sensitivity analysis alters one assumptions by leaving the other assumptions similar andascertains the process of changes relating to the NPV and IRR. At the time of assessing thecapital budgeting project managers are required to forecast the cash flows. The methods involves in forecasting the cash flows is reliant on the sales forecast andcosts. The sales revenue reflects the functions of the sales volume along with the unit sellingprice. Sales volume of the project is reliant on the market size and the organizations marketshare (Sanchez et al. 2014). The NPV and the IRR of the project are derived by the managersfollowing the analysis of the after tax cash flows. This is arrived by combining the numerousvariables of the cash flows, life of the project and rate of discount. Therefore, the behaviourof all the variables are most likely uncertain. The sensitivity analysis helps in locating thehow the sensitive of the numerous variables that are estimated for the project. Therefore,sensitivity analysis reflects how sensitive is the NPV and the IRR of the project relating to thegiven change in the particular variables. Relation of Capital Budgeting in Scenario Analysis: As evident from the scenario analysis, typically one variable is varied at a period.Given that the variables are interrelated, which they are most likely to be it is necessary to
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