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What methods are used to ascertain the risk in capital budgeting decisions?
The methods which are used to ascertain the risk in capital budgeting decisions include:-
1) Sensitivity Analysis: - It is also known as what-if analysis where it gives the information about the feasibility of a project in variable quantities. It is calculated in terms of NPV (Net Profit Value).
2) Scenario Analysis : - In this analysis deviation of number of interconnected variable is determined. It doesn’t concentrate on change in one particular variable at specific point of time.
3) Break Even Analysis : - this analysis is used to determine the minimum production and sales amounts for a project to avoid losing money.
4) Simulation Analysis :- Is used in formulating the probability analysis for a criterion of merit with the help of random blending of variable values that carry a relationship with the selected criterion.
5) Corporate Risk Analysis : Its main focus is on the analysis of risk that may have big influence in cash flow of the firm.
6) Risk Management:- Its main focus is on price strategy, fixed and variable cost, insurance, long term arrangements, derivatives, strategic alliance and improvement of information.
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