Training session for co-workers in your workplace on conducting a Sensitivity Analysis

 

You are leading a training session for  co-workers in your workplace on conducting a Sensitivity Analysis as a  tool for Capital Budgeting. In your presentation, propose quantitative  and qualitative factors, methods, or techniques used to integrate risk  into proper capital budgeting decisions.

Prepare a PowerPoint presentation on this topic. In 7 content slides,

Identify the goal and functions of financial management. 
Distinguish which qualitative and quantitative steps are necessary in conducting a Sensitivity Analysis. 
Describe the internal and external  financial methods used to determine a project’s risk integrated into a  Capital Budgeting analysis.

 

Slide 3: Sensitivity Analysis: Definition and Goal

 

TitleSensitivity Analysis: What It Is and Why We Use It
DefinitionSensitivity Analysis is a technique that examines how the Net Present Value (NPV) or Internal Rate of Return (IRR) of a capital project changes when one key input variable is varied, holding all other variables constant.
Goal in Capital BudgetingTo identify which project variables (e.g., sales volume, price, costs) are most critical to the project's success or failure, thus highlighting where managers should focus their control efforts.
ResultProvides a range of possible outcomes (best, worst, and expected case) for the project’s value, illustrating the project's inherent risk.
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Slide 4: Quantitative Steps in Sensitivity Analysis

 

TitleQuantitative Steps: Conducting the Analysis
Step 1: Define the Base CaseCalculate the project’s Base Case NPV using the most likely (expected) values for all input variables (e.g., expected sales volume, expected unit cost).
Step 2: Identify Key VariablesDetermine which quantitative variables have the greatest potential to fluctuate and impact the project's cash flows (e.g., Sales Volume, Unit Price, Variable Cost per Unit, Fixed Costs).
Step 3: Define Worst and Best CasesFor one variable at a time, estimate its worst-case value (e.g., Sales Volume drops by 20%) and its best-case value (e.g., Sales Volume increases by 15%).
Step 4: Recalculate Project ValueRecalculate the project's NPV for the worst-case and best-case scenarios for the chosen variable, while keeping all other variables at their base-case values.
Step 5: Compare and AnalyzePresent results in a "Tornado Chart" or table to visually rank variables by how sensitive the NPV is to changes in them (e.g., NPV is most sensitive to Sales Volume).

Sample Answer

 

 

 

 

 

 

 

 

Sensitivity Analysis for Capital Budgeting: Integrating Risk

 

This presentation outlines the role of financial management, the steps in conducting a sensitivity analysis, and the methods used to integrate risk into capital budgeting decisions.

 

Slide 1: Title Slide

 

TitleSensitivity Analysis: Integrating Risk in Capital Budgeting
SubtitleA Tool for Enhanced Decision-Making
Presenter[Your Name/Title]
Date[Date]
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Slide 2: Goal and Functions of Financial Management

 

TitleFinancial Management: Goal and Core Functions
GoalThe primary goal of financial management is to maximize shareholder wealth (or firm value), which is typically measured by maximizing the stock price.
Core Functions1. Investment Decisions (Capital Budgeting): Determining which long-term assets or projects the firm should invest in (e.g., purchasing new equipment, expanding a facility).
2. Financing Decisions (Capital Structure): Determining the optimal mix of debt and equity used to fund those investments.
3. Working Capital Management: Managing the firm's short-term assets and liabilities (e.g., inventory, accounts receivable, and accounts payable) to ensure liquidity.
4. Risk Management: Identifying, assessing, and prioritizing risks to minimize their impact on the firm's financial health.
FocusOur focus today is on function #1 and #4: Capital Budgeting and Risk Management.

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