Methods of Financial Analysis in Capital Budgeting

Operate financial
management

Table of Contents
INTRODUCTION...........................................................................................................................5
TASK...............................................................................................................................................5
1. Sensitivity analysis:.................................................................................................................5
2. Scenario analysis:....................................................................................................................6
3.Break even analysis:.................................................................................................................7
4. Simulation analysis:................................................................................................................9
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
For getting competitive advantages, company needs to opt various tools that could be
used in the business for analysis which would also assist in making strategies for the firm. These
tools are to be conducted by considering various ways. Whole project are required to be made by
opting several techniques and information is gathered by way of collecting various data. Under
this report, various methods are to be considered with the help of several key techniques. Under
this report, various analysis reports are discussed (Smit and Watkins, 2012). These would be
sensitivity analysis, scenario analysis, Break even analysis and other simulation process.
TASK
1. Sensitivity analysis:
Various investment decisions are made with the help of capital budgeting process. Under
this analysis, consideration are required to be emphasised for several factors which are the risks.
By analysing forecasted and the actual outcomes, variance occurred which would enhanced risks
factor. There are so many hypothesis made, and the ways or the level under which NPV is
affected by varying in them and that would be identified with the assistance of sensitivity
analysis. With the help of sensitivity analysis, the variation on is identified. By implementing
several components on net present value or internal rate of return would be identified. By
implementing such changes under variable factor on NPV or IRR is determined (Lusardi, 2012).
The risks is assessed and management is striving hard to eliminated it in most effective manner,
and also make decisions accordingly, so that the optimum return can be taken. The key object of
capital budgeting is attained by opting sensitivity analysis.
For making the best sensitivity analysis, the company is required to adhere entire steps that are
emphasised under this regards will be followed that would be covering the followed steps:
 In respect of variables, forecasting would be made that is implemented to reach at
specific conclusion.
 The level upto which forecasting would be determined by investigation whole chooses
variable.
 Future examination are to be framed in order to determine any wrongful changes.
 Whole variation could be found and recorded under percentage form.

With the help of above mentioned procedure, various benefits would be received by the company
in order to avoid the company from various losses. However, there are so many benefits or
drawbacks that are linked to it and are rendered under it.
Illustration 1: NPV sensitivity analysis
(Sources: Sensitivity analysis, 2017)
Benefits:
 Sensitivity analysis is the main assumption that are made in order to identify of risks that
would be implemented to make deal with them (Schaeck and Cihak, 2012).
 Such process covered in estimated would become more healthy by implementing
sensitivity.
Drawbacks:
 The outcomes would be better if the gathered data is adequate and reliable.
 At once, only one hypothesis is made.
 It is the not an easy task for the managers to determined it as the procedure covered
under this complex.
So entire above mentioned factors are required to be considered at the time of performing the
analysis that would be identifiable for making strategies.