Capital Budgeting Techniques: Sensitivity, Scenario, Break-even, and Simulation Analysis

Individual Case Study
Assessment 2

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK ..............................................................................................................................................1
Sensitivity analysis.......................................................................................................................1
Scenario analysis..........................................................................................................................3
Break-even analysis.....................................................................................................................4
Simulation analysis......................................................................................................................5
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Capital budgeting is the way of assessing the effectiveness of long-term investments in
buying or replacing building and machinery, fresh product lines or other initiatives (Ardalan,
2017). There have been different techniques of capital budgeting that are used by the manager of
for making comparison of total cash inflows and outflows of a specific project but also have
assorted approach. The various method are Payback Period, Net Present Value (NPV),
Accounting Rate of Return (ARR), Internal Rate of Return (IRR), Profitability Index (PI).
In this project crucial concept of capital budgeting are discussed that includes Sensitivity
analysis
, Scenario analysis
, Break-even analysis
and Simulation analysis.
TASK
Sensitivity analysis
Sensitivity analysis defines how distinct standards of an independent variable in a
specified collection of assumption might influence a relevant dependent variable. Within general
and specific boundaries depending on more than one input factors, this method is used. This is
because this method is based on modifications within factors that are recognized as input factors,
it is a financial strategy that specifies how target factors are influenced. This concept mainly
works upon a very simple standard such as change the model and observe the behaviour. There
have been systematic steps that are needed to be followed by a researcher to conduct authentic
sensitivity analysis that are as follows:
 The first step is related with defining the output such as assume the NPV at the specific
entry range of the base case under which the sensitivity should be assessed. Most the
model's other outputs are held constant.
 Then the output value at a new input value is measured while retaining certain inputs
consistent (Brunner and Ostermaier, 2019).
 Then actual changes in the percentage of output and input are being determined.
 The sensitivity is computed by separating the shift in proportion of production by the
shift in input proportion.
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