Corporate Financial Management: Tools for Capital Budgeting Decisions

This report delves into the realm of corporate financial management, specifically focusing on capital budgeting techniques to aid in effective decision-making. It begins by introducing the importance of corporate decision-making in fostering organizational growth and profitability, highlighting its role in aligning budgeted outcomes with actual goals. The report then explores key tools used in capital budgeting, including sensitivity analysis, which assesses the impact of independent variable changes on dependent variables, assisting in investment project evaluations. Scenario analysis is examined, providing insights into various investment outcomes under different conditions. Break-even analysis is presented as a method to determine the point where revenues equal costs, aiding in assessing project viability and timeframes for cost recovery. Finally, the report discusses simulation techniques, which incorporate probability distributions and sensitivity analysis to evaluate risk levels in investment projects. The conclusion synthesizes these findings, emphasizing the value of each technique in making informed investment decisions.

RUNNING HEAD: Corporate financial management
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Corporate Financial Management

Corporate financial management 2
Contents
Introduction.......................................................................................................................3
Sensitivity Analysis..........................................................................................................3
Scenario analysis..............................................................................................................5
Break even analysis..........................................................................................................7
Simulation techniques.......................................................................................................8
Conclusion........................................................................................................................9
References.......................................................................................................................11

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Introduction:
Corporate decision making is a process which takes place at every stage in an
organization. This process helps the company to make a better decision. These decisions are
taken to support the organizational growth. Corporate decision making plays a crucial role in
an organization. These decisions are mainly taken by the leader to manage the performance
and the profitability of the organization (Lee. & Lee, 2006). Further, it has also been found
that the corporate decision making helps the organization to set a link between the budgeted
outcome and goals of the company and the actual goals of the company.
In this report, capital budgeting has been taken into consideration and it has been
analyzed that how corporate decision making process helps an organization into making the
best decision about various investment opportunity and plans (Damodaran, 2011). This report
briefs the user about various tools of corporate decision making which are helpful for the
organization to make a better decision. Further, it has also been found that the following are
some of the tools which could be useful for the company to manage the capital budgeting
techniques:
Sensitivity Analysis:
Sensitivity analysis is a technique which is useful for the companies to evaluate the
various values of an independent variable which makes an impact over the specific dependent
variable under some assumptions. Sensitivity analysis technique is technique which 9s mostly
uses by the organization to make a better decision about various investments such as return
from one project and risk from other investment project. This analysis is helpful for the
organizations to make and develop an effectual and effective business plan which is required
by the companies to handle entire risk variables from the business functioning of the
company and economical circumstances (Bornholt, 2013). Further, it has been observed that

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the sensitivity analysis aids the organization in managing the various activities in terms of
choosing the best investment project for the company which offers high return to the
company and the cash outflow is quite lesser than the cash inflow of the company. Sensitivity
analysis is used by the companies to identify and evaluate the best project into the available
projects.
(Moles, Parrino & Kidwekk, 2011
In concern of capital budgeting, it has been found that the sensitivity analysis offers
an analysis over various variable factors and aspects such as cost, sales, investment plans,
interest on loan, present value factor, present value etc. it has been observed that in sensitivity
analysis, present value factor must be calculated according to the various assumption which is
taken for evaluating the factors which could affect the condition of the company and
investment project. Such as if an organization is required to earn $ 10,00,000, $ 20,00,000
and $ 30,00,000 in next 3 years (Peterson, & Fabozzi, 2002). And for it, he invest into a
project where the internal rate of return is expected 10% than the investor must invest $
60,00,000 so that the entire expenses could be get back by the company in given time period.
further, it has been analyzed that the if IRR rate is changed in this case than the entire

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expense would be get back by the company soon and thus the BEP point would also be get
earlier. Internal rate of return and net present value would be quite high if all the related
factors would be influenced positively by the company or vice versa.
Scenario analysis:
Scenario analysis is a technique which is useful for the companies to evaluate the
various values of an independent variable which depicts the different result in different
scenario. Scenario analysis technique is technique which is mostly uses by the organization to
make a better decision about various investments such as return from one project and risk
from other investment project (Reilly & Brown, 2011). This analysis is helpful for the
organizations to make and develop an effectual and effective business plan which is required
by the companies to handle entire risk variables from the business functioning of the
company and economical circumstances. Further, it has been observed that the Scenario
analysis aids the organization in managing the various activities in terms of choosing the best
investment project for the company which offers high return to the company and the cash
outflow is quite lesser than the cash inflow of the company. Scenario analysis is used by the
companies to identify and evaluate the best project into the available projects (Ross et al,
2008).
Factors Normal case Best case Worst case
Yield - + 10 % 20%
Exchange rate - + 10 % 10%
Transportation - -5% +20%

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cost
Marketing cost - -5% +20%
Sales cost - + 10 % 20%
Sales price 1.03 1.05 1.00
Cash inflow 17 % 29 % 1 %
NPV 1 2.2 -2.7
In concern of capital budgeting, it has been found that the scenario analysis offers an
analysis over various variable factors and aspects such as cost, sales, investment plans,
interest on loan, present value factor, present value etc. it has been observed that in scenario
analysis, various aspects are taken into consideration and this study is done to make a better
scenario for the company such as if company require a fixed amount after a fixed period than
in which market company is required to invest and how much amount is required to invest for
a fixed time period (Ross, Westerfield & Jaffe, 2007). For this study, various tools such as
NPV, IRR, payback period, ARR are calculated and after evaluating every tool, a scenario is
prepared. If the best scenario is made by the company than the Internal rate of return and net
present value would be quite high of the company or vice versa.
Break even analysis:

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Break even analysis is a study which is used by the companies to determine a point
where the entire revenues which has been received by the company are equal to the entire
associated cost. Break even analysis is a technique which is useful for the companies to
evaluate the various level of a company’s profitability condition. Break even analysis
technique is a technique which is mostly uses by the organization to make a better decision
about various investments such as the total time period in which company would be able to
get back the entire associated cost. This analysis is helpful for the organizations to make and
develop an effectual and effective business plan which is required by the companies to handle
entire risk variables from the business functioning of the company and economical
circumstances (Seitzinger et al, 2010). Further, it has been observed that the Break even
analysis aids the organization in managing the various activities in terms of choosing the best
investment project for the company which offers high return to the company and the cash
outflow is quite lesser than the cash inflow of the company. Scenario analysis is used by the
companies to identify and evaluate the best project into the available projects.
(Tian & Jiang, 2015)
In concern of capital budgeting, it has been found that the Break even analysis offers
an analysis over various variable and fixed factors and aspects such as cost, sales, investment
plans, interest on loan, present value factor, present value etc. it has been observed that in
Break even analysis, various aspects are taken into consideration and this study is done to
make a better scenario for the company such as if company wants to make an investment into

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a particular project than how much time would it take to the company to get back the entire
cash outflow amount. The capital budgeting decision is taken according to the total time
period in this technique (Tsanakas & Millossovich, 2016). The lesser the time would be
taken, the more likable the project is. For this study, various tools payback period, discounted
payback, fixed amount, variable amount etc. are calculated and after evaluating every tool, a
break even analysis study is prepared. If the time period is lesser in a project than there are
quite more chances of the project to become profitable and vice versa (Zabarankin, Pavlikov
& Uryasev, 2014).
Simulation techniques:
Lastly, simulation techniques have also been analyzed to identify the capital
budgeting techniques and tools. In simulation techniques, probability distribution and
sensitivity analysis is taken into consideration. Simulation techniques are a study which is
used by the companies to choose a point where the company would be more profitable.
Simulation techniques analysis is a technique which is useful for the companies to evaluate
the various level of a company’s profitability condition. Simulation techniques analysis
technique is a technique which is mostly uses by the organization to make a better decision
about various investments such as the total time period in which company would be able to
get back the entire associated cost (Barlow, 2006). This analysis is helpful for the
organizations to make and develop an effectual and effective business plan which is required
by the companies to handle entire risk variables from the business functioning of the
company and economical circumstances. Further, it has been observed that the simulation
techniques analysis aids the organization in managing the various activities in terms of
choosing the best investment project for the company which offers high return to the
company and the cash outflow is quite lesser than the cash inflow of the company. Simulation

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techniques analysis is used by the companies to identify and evaluate the best project into the
available projects (Lumby, & Jones, 2007).
For conducting the research over the simulation analysis, it is required by the
company to firstly choose a random number and then carry on the study on the basis of that
random number. In concern of capital budgeting, it has been found that the Simulation
techniques offers an analysis over various random numbers, factors and aspects such as cost,
sales, investment plans, interest on loan, present value factor, present value etc. it has been
observed that in Simulation techniques, various aspects are taken into consideration and this
study is done to make a better decision for the company such as if company wants to make an
investment into a particular project than how much time would it take to the company to get
back the entire cash outflow amount (Batra & Verma, 2014). The capital budgeting decision
is taken according to the random numbers in this technique. The plot where the probability
distribution would be plotted, it would be the place of project level risk. For this study,
various tools have been calculated to examine the level of risk which could be faced by the
company if company would make an investment into that particular investment program. And
after evaluating every tool, a Simulation techniques analysis study is prepared.
Conclusion:
Thus through the above study, it could be concluded that there are various factors
which are available for a company into the market to make a better decision about the
investment into the various projects. Through this study it has been learned that the
sensitivity analysis look over various dependent and independent variables. Scenario analysis
looks over the related factors and makes a scenario for investment. Break even analysis
estimate the level of revenue and cost to make a better decision and lastly, the Simulation
techniques are evaluated to examine the level of risk which could be faced by the company if

Corporate financial management 10
company would make an investment into that particular investment program. And after
evaluating every tool, a Simulation techniques analysis study is prepared.

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References:
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Wiley & sons ltd, England
Batra, R. & Verma, S. 2014, "An Empirical Insight into Different Stages of Capital
Budgeting", Global Business Review, vol. 15, no. 2, pp. 339-362.
Bornholt, G. 2013, "The Failure of the Capital Asset Pricing Model (CAPM): An Update and
Discussion: The Capital Asset Pricing Model", Abacus, vol. 49, pp. 36-43.
Damodaran, A, 2011, Applied corporate finance,3rd edition, John Wiley & sons, USA
Lee.C.F & Lee, A, C,.2006,Encyclopedia of finance, Springer science, new York
Lumby,S & Jones,C,.2007, Corporate finance theory & practice, 7th edition, Thomson,
London
Moles, P. Parrino, R & Kidwekk, D,.2011, Corporate finance, European edition, John Wiley
&sons, United Kingdom
Peterson, P,P & Fabozzi,F,J,. 2002, Capital budgeting: theory and practice, John Wiley &
sons, Canada
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South western Cengage learning, India
Ross, A,. Westerfield, R,W,. Jaffe,J,.& Kakani,R,K,.2008, Corporate Finance, 8th edition,
Tata McGraw hill education private limited, New Delhi, India
Ross, S, A,. Westerfield, R, W,. & Jaffe, J,.2007, Corporate Finance, the McGraw-hill, India
Seitzinger, S.P., Mayorga, E., Bouwman, A.F., Kroeze, C., Beusen, A.H.W., Billen, G., cht,
v., G, Dumont, E.L., Fekete, B.M., Garnier, J. & Harrison, J. 2010, "Global River Nutrient