FIN200 Assignment: Capital Budgeting and Decision-Making Techniques

This report delves into corporate financial management, specifically focusing on capital budgeting and decision-making techniques. It comprehensively explains sensitivity analysis, which assesses the impact of variable changes on project outcomes; scenario analysis, which evaluates project performance under different circumstances; break-even analysis, which determines the point at which a project becomes profitable; and simulation analysis, which uses probabilistic models to handle uncertainty. The report connects these techniques to capital budgeting concepts such as net present value and internal rate of return, providing a detailed understanding of how these tools inform crucial investment decisions. It emphasizes the importance of these analyses in mitigating risks and maximizing returns, thereby improving the quality of corporate decisions.

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Corporate financial management

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Table of Contents
Introduction......................................................................................................................................3
a. Sensitivity analysis.......................................................................................................................3
b. Scenario analysis..........................................................................................................................4
c. Break-even analysis.....................................................................................................................5
d. Simulation analysis......................................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
Decision making is an important requirement in the business and it is to be completed in an
effective manner. There is the need to use various techniques which are available in this process
so that the best decision can be made. The business will be making improvements with the help
of the decisions and therefore they are required to be made in the best manner. The main
techniques which can be used are scenario analysis, breakeven analysis, sensitivity analysis, and
simulation. They are required to be understood in the proper manner and for that an
understanding of them is provided in the report below in a detailed manner.
a. Sensitivity analysis
Capital budgeting is the technique with the help of which all of the important investment which
is required to be made will be analyzed and evaluated. There are several aspects which need to
be covered before making any of the investments by the company. There is the risk and return
which is involved in any project and before making of decision they shall be considered so that
the one which will be proving the company with the best results will be selected (Herman and
Usher, 2017). There is a difference in the results which are expected by the company and the
ones which are attained actually by the company. All of the variances which are available will
have to be identified and with that the reason for the change shall also be identified. In case of
the high variance there will be involvement of the risk which shall be avoided. For this the
sensitivity analysis is performed in which the impact of the change in the variable on the results
of the project is analyzed. The net present value at the different variables will be analyzed and
then the decision will be made accordingly.
This will be helping in making the evaluation of the project and by that, the decision for the
selection of the best project will be made. All of the aspects in relation to the project will be
identified and then the risk which will have to be borne by that will also be taken into account.
The comparison among all the available projects will be made and the factors which are leading
to the adverse impacts will be also be identified (Baio and Dawid, 2015). The main motive of the
business is to earn higher returns and so the company will be choosing the project which will be
provided with the best profits. There will be undertaking of the proper process for the sensitivity

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analysis. In that all of the variables which affect the business will be identified and then the
changes which are taking place in them will also be determined. The results will be calculated by
covering all of the changes. The deviation in the result and the factor will be considered and with
that the level of the sensitivity will be identified. The result which will be obtained will be
provided with the most sensitive variable. This will be helping in taking the future decisions as
when the change in the same variable will be taking place then the situation will be analyzed
appropriately.
There will be consideration of all the uncertainty and risk in advance and so all the adverse
impacts will be identified. The company will be taking all the required steps to eliminate the
negative impacts and by that, the best results will be attained and losses which could have been
faced will be avoided. In the making of the calculation under this technique there are several
assumptions which are made and are taken into consideration (Rodríguez et al., 2013). The
company will be using all of the findings and with the help of those forecasts will be made for
the coming period. They all will be taken into account in the further processes which will be
taken in the coming period. The results will be improved with the help of this as there will be
avoidance of all the risks and uncertainties which are involved.
There will be making of the roper plan which will be undertaken and by which the risk which is
involved can be avoided and this will be done with the help of the proper information which will
be collected. There will be the undertaking of the best project with the help of this and it will be
increasing the gain of the company.
b. Scenario analysis.
The techniques which are available under the capital budgeting are used by the company for the
making of the correct decisions. There are several options which are available with the company
and it becomes difficult to choose the best from them. For this, there is the consideration of all
the information and then the decision will be made in such manner that there is no adverse
impact which will be faced (Zhang et al., 2012). There are several circumstances which will be
involved and with that many changes will also be taking place in the company. There will be
various scenarios and it is highly required that the impact of them on the project shall be
analyzed beforehand.

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Scenario analysis will be used in such a situation and in that there will be consideration of all the
situations and their impacts. The variables which are changing in them will be identified and
with that the change which will be made with them will also be taken into account. The
frequency of the occurrence of the situation will also be considered and by that the decision
making will be made in appropriate manner (Slegers et al., 2013). There is the risk which is
involved and in that the manager will be willing to take the risk till a certain point and that will
be identified as the tolerance level. The company will be identifying that level and will be
considering the same. In the making of the decision all of this will be considered and then the
decision will be made by taking them into account. The process will be required to be followed
in proper manner and in that there are several steps which are undertaken and work will be
carried in accordance with them. There will be need to identify all of the issues which are
involved in the process and then consideration will be given to them in the advance.
By the help of this, any negative results will be avoided and there will be attainment of the goals
which have been set in advance (Hao et al., 2015). There will be correlation which will be
existing and that will have to be identified. All the assumptions will be considered and then on
that basis the best case and the worst case will be identified.
c. Break-even analysis.
The proper process is performed in the business in relation to the sales which is made. In that,
there is the cost which is incurred and it is required that the same shall be maintained in adequate
manner. The balance will be required to be established among the costs and the revenues which
are made on them. By the help of that it will be possible for the company to make the profits
which are the main aim (Comans et al., 2013). There are the variables as well as the fixed cost
which is incurred. The cost which will be changing with the change in the output will be
considered as the variable cost and the remaining is the fixed element. There is the need to
recover the fixed cost as this s the amount which will be incurred with or without any sales. Due
to this it is required that the sale at which the recovery of the fixed cost will be made shall be
identified as the profits will be earned by the business after this level.
The point in the company at which the business will neither be earning any profit nor will be
making the loss is identified to be the breakeven point. This is the point at which the cost will be

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recovered and profits will start to flow in the business (Nykamp et al., 2014). It is required that
the same shall be calculated and for that, the fixed cost and sale value together with the variable
cost will be required to be ascertained. By the help of them there will be calculation of the
breakeven sale. Once the calculation is made there will be comparison which will be made
between the actual sale and the breakeven point. If the sales will be more than the breakeven then
the company will be earning the profits and the proposal shall be accepted (Laskaris and Regan,
2013). The difference between them is identified to be the point of safety which ensures that
company will be earning some amount and there will be no losses which will have to be borne by
the business.
The breakeven point will be calculated by dividing the fixed cost with the contribution per unit
and then the decisions will be made accordingly. The projects will be evaluated on the basis of
them and then the company will be able to avoid all the circumstances in which losses can be
made.
d. Simulation analysis
The performance of the business will be made with the undertaking of the effective decisions and
for that, there will be use of several techniques and one of them is simulation. The uncertainty is
faced in the cases when the sparse data is available. In such situation there is the difficulty which
is faced in the making of the analyzation which will have to be made as the information which is
required is limited. The business will be using the simulation in such situations and in them there
will be low risk with the low cost which is incurred (Dartanto, 2013). There will be use of the
available data for the making of the analyzation and in that various aspects will be covered.
There will be use of the trial and error method in which the results which are required to be
gained with the help of trials.
In the business, there are various tasks which are required to be performed and some of them
attain a higher priority than others. The ones which are on more priority will be selected and then
they will be carried on prior basis. By the help of this the goals and objectives which are set will
be attained in an effective manner. There are some standards and models which need to be
considered and they all will be developed to be taken into use. By the help of them the
probability of gain will be increased and business will be attaining higher results (Konstantzos,

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Tzempelikos and Chan, 2015). There will be allotment of the probability to all the aspects and
then random selection will be made. The selected set will then be used and the calculation of the
profit will be made at the same. This will be performed several times and the one which will be
provided with the best result will be selected.
Conclusion
In this report, several techniques which are available to be used under the capital budgeting have
been considered. All of the details in relation to the techniques have been provided which will be
helping them in making of the best decision and the proposal which will be yielding the highest
returns will be taken into consideration. The evaluation of the project will be made with the help
of the available tools and then the proper performance will be made possible. There is sensitivity
analysis, simulation, breakeven analysis and scenario analysis which will be taken into use by the
company. This will be done in the advance and all the adverse aspects will be identified. The
plan will be set in such manner that all the negative impacts are eliminated and there is the
attainment of the positive results by the business.

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References
Baio, G. and Dawid, A.P. (2015) Probabilistic sensitivity analysis in health
economics. Statistical methods in medical research, 24(6), pp.615-634.
Comans, T.A., Martin-Khan, M., Gray, L.C. and Scuffham, P.A. (2013) A break-even analysis of
delivering a memory clinic by videoconferencing. Journal of telemedicine and telecare, 19(7),
pp.393-396.
Dartanto, T. (2013) Reducing fuel subsidies and the implication on fiscal balance and poverty in
Indonesia: A simulation analysis. Energy Policy, 58, pp.117-134.
Hao, H., Liu, Z., Zhao, F., Li, W. and Hang, W. (2015) Scenario analysis of energy consumption
and greenhouse gas emissions from China's passenger vehicles. Energy, 91, pp.151-159.
Herman, J.D. and Usher, W. (2017) SALib: An open-source Python library for Sensitivity
Analysis. J. Open Source Software, 2(9), p.97.
Konstantzos, I., Tzempelikos, A. and Chan, Y.C. (2015) Experimental and simulation analysis of
daylight glare probability in offices with dynamic window shades. Building and
Environment, 87, pp.244-254.
Laskaris, J. and Regan, K. (2013) The new break-even analysis: it's time to expand the scope and
assumptions of the traditional break-even analysis. Healthcare Financial Management, 67(12),
pp.88-96.
Nykamp, S., Bakker, V., Molderink, A., Hurink, J.L. and Smit, G.J. (2014) Break‐even analysis
for the storage of PV in power distribution grids. International journal of energy research, 38(9),
pp.1112-1128.
Rodríguez, G.C., Andrés, A.C., Muñoz, F.D., López, J.M.C. and Zhang, Y. (2013) Uncertainties
and sensitivity analysis in building energy simulation using macroparameters. Energy and
Buildings, 67, pp.79-87.

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Slegers, P.M., Van Beveren, P.J.M., Wijffels, R.H., Van Straten, G. and Van Boxtel, A.J.B.
(2013) Scenario analysis of large scale algae production in tubular photobioreactors. Applied
energy, 105, pp.395-406.
Zhang, Q., Ishihara, K.N., Mclellan, B.C. and Tezuka, T. (2012) Scenario analysis on future
electricity supply and demand in Japan. Energy, 38(1), pp.376-385.