Capital Budgeting and Investment appraisal Technique in an Organization

   

Added on  2019-10-30

13 Pages2916 Words456 Views
Running Head: Corporate Accounting1Project Report: Corporate Accounting
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Corporate Accounting2ContentsIntroduction.......................................................................................................................3Sensitivity analysis...........................................................................................................4Scenario analysis..............................................................................................................5Break even analysis..........................................................................................................7Simulation techniques.......................................................................................................9Conclusion......................................................................................................................10References.......................................................................................................................12
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Corporate Accounting3Introduction:This report has been prepared to identify the capital budgeting and the corporate decision making process in an organization. Investment appraisal technique i.e. capital budgeting is a process where various investments are analyzed on the basis of many variablesto find out the best investment opportunity for an organization. Basically, long term investment opportunities are evaluated into capital budgeting techniques. These techniques are helpful for the company to manage the various factors and it looks over the various factors such as the PV factor, return, cash outflow, cash inflow etc. It has been observed that the long term investment could be various investment proposals such as diversification of market, buy new machineries, new plants, replacement of new machineries, various research development projects, new products and services into the market etc. it has been found that for conducting various tools to analyze the best investment proposal, an organization can takethe help of sensitivity analysis, scenario analysis, break even analysis, simulation technique analysis (Damodaran, 2011). Every organization wants to invest in a project which offers them maximum return in less investment as well as the associated risk is also lower in that case. For a better project, companies are required to look over the investment and then choose a best tool accordingly. Such as if company wants to earn a specific amount after a period of time, than company must go for scenario analysis as well as if the company wants to reach over a point where the cost is equal to the revenue than company must choose the breakeven analysis as a technique to opt the best available project (Barlow, 2006). This report will brief the user about the sensitivity analysis, scenario analysis, break even analysis, simulation technique analysis and their process and the situation where all of these tools could be used by the company to analyze the best result.
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Corporate Accounting4Sensitivity analysis:Firstly, sensitivity analysis has been studied as a tool of capital budgeting technique tomake a better corporate decision for the goodness of the company. Sensitivity analysis is an instrument which is used by companies to estimate that how several expanded values of an independent variable could be affected by a detailed variable that has been calculated throughmany assumptions by the managers. “What if” analysis is the other name of this technique. Normally, entire quantitative aspect of an investment proposal such as cash inflow, cost of capital, cash outflow, project duration, discount rate etc are predictable with an assurance. But in fact, these things rarely take place (Lumby & Jones, 2007). This analysis assists the companies to defeat the same difficulty of assumptions. The sensitivity analysis techniques could be useful over diverse planning actions and not only upon the capital budgeting corporate decision. Sensitivity analysis assists an association into making the calculations that how the allocation of probable IRR and NPV for an investment proposal under few circumstance is impacted subsequently in a company to make an alteration into a sole variable which is reliant in scenery. This sensitivity analysis could occur only be altering into single variable at a time period. Sensitivity analysis calculates a rate for every variable and proposes a decision making procedure to the corporation to decide the best investment project (Moles, Parrino & Kidwekk, 2011). For instance, if the selling price of a product would be deducted by 20% andconsequently, the IRR would also be distorted due to some changes in the life of the project to 5 years from 3 years. Thus this analysis assists the company to take superior decision aboutproposal of investment. According to the above instance, every aspect would be altered due to various changes into a particular variable of the proposal. For instance, the changes which have been
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