Importance of Sensitivity, Scenario, Break-Even and Simulation Analysis in Capital Budgeting

This article discusses the importance of sensitivity, scenario, break-even and simulation analysis in capital budgeting. Sensitivity analysis helps in measuring the sensitivity of outcome of a project, scenario analysis deals with different future scenarios, break-even analysis is required to know the level of operation necessary to cover other costs, and simulation analysis requires performing a series of infinite calculations to reach a goal in financial aspects. The article also explains the relationship between these analyses and net present value (NPV) and internal rate of return (IRR) methods.