Corporate Decision Making: Tools And Techniques For Capital Budgeting

Corporate Decision Making and its Significance

Question:

Discuss About The Corporate Decision Making Plays A Crucial?

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 audit 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 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 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.

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 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.

Tools and Techniques of Corporate Decision Making:

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 project management (Ross et al,  2008).

Factors	Normal case	Best case	Worst case
Yield	–	+ 10 %	–          20%
Exchange rate	–	+ 10 %	–          10%
Transportation cost	–	-5%	+20%
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 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.

Sensitivity Analysis

(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 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).

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 techniques analysis is used by the companies to identify and evaluate the best project into the available projects (Lumby, & Jones, 2007).

Scenario Analysis

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

References:

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Tian, D. & Jiang, L. 2015, “Quasiconvex risk statistics with scenario analysis”, Mathematics and Financial Economics, vol. 9, no. 2, pp. 111-121.

Tsanakas, A. & Millossovich, P. 2016, “Sensitivity Analysis Using Risk Measures”, Risk Analysis, vol. 36, no. 1, pp. 30-48.

Zabarankin, M., Pavlikov, K. & Uryasev, S. 2014, “Capital Asset Pricing Model with drawdown measure”, European Journal of Operational Research, vol. 234, no. 2, pp. 508.