Sensitivity Analysis Assignment Help | Simulation techniques



FINANCE ASSIGNMENT

Introduction

The following has been prepared with the objective to find out the different capital budgeting techniques, it had been observed with the past history of the company’s book that preparing a capital budgeting is one of the foremost and important parts of any enterprise. Capital budgeting is the planning process and is termed as the investment appraisal process of a company as it helps to determine the investment pattern of the firm and answers to the question of the ratio between the long term and short-term investment of the firm. The assignment had highlighted the fact of the company’s management system can able to follow while making the capital decision of the firm, OrotonGroup Plc.

As commented by Graham & Sathye (2017), the sensitivity analysis of a company is the process based on which the different values of independent values impact the specific value with respect to the provided assumptions. Regan et al. (2015) stated that, the specific boundaries are mentioned in the technique that depends on more than input values. This results in the change in the rates of the interest that have the bond price. The Ortodon group uses the sensitivity analysis process in the field of the case of the interest rate as well as the foreign exchange risk. Application of the process of the sensitivity analysis gives the advantage of the ortodon company to compel the decision maker and allow identifying the values that affect the forecasts of the cash flow.

As commented by Turner & Guilding (2013), the use of the sensitivity analysis helps in the expose of the inappropriate cashflow forecast that guides the person in making the proper decision. The technique also helps to consider the actions that help in strengthening the limitations in the project. In the Ortodon group the cash flow in the year 2015 was $ 141,038 whereas the cash flow increased in the year 2016 $151,873. The technique of the capital budgeting thus helps in the improvement of the cash flow with respect to the receipts from the customer(Orton group ,2016). The interest received from the customers in the ortodon also increased in the year 2016 $ 17,006. Cash equivalents of the company previously in 2015 were $ 2,181 which later increased in 2016 that is $ 2,816(Orton group, 2016). However, the use of the sensitivity analysis has some limitations it does not gives the exact cut results of the company. The technique lacks the interrelationship between the provided values in the company. As for example, the sales of the volume may be related to the cost and the price to analyze the values separately. Although the Ortodon company manages to avoid the limitations in the process and gain profit from the technique.

As commented by Walters & Ramiah (2017), the technique of the scenario analysis is applied to understand the possible events of the future with considering the alternative possible outcomes. This can be considered as one of the most important forms of the projections that do not show the actual picture of the future. This technique involves the various reinvestment rates for the expected returns in the future. This process is based on the principles of statistical and mathematical events. Adopting the method by the Ortodon group can calculate the estimated shifts in the values of the portfolio. This identifies the potential risks in a given investment as to relate the variety of the given events. As commented by Smark & Mir (2017), with respect to the consumer side, a person utilizes the scenario analysis in the examination of the various financial outcomes of the purchase of an item in the basis of credit. Moreover, it also helps the person to see the different financial alterations that occur in deciding the offer for a new job post. The ortodon group while using the scenario analysis can able to analyse the financial results of the decisions as for example selecting either one or two facilities of the storefronts for the operation of the business. It contains the decisions such as the difference in rent the utility insurance and the charges. The strategy of the scenario analysis used by the ortodon company is the risk management strategy.

As commented by Walters & Ramiah (2017),  analyzing the problem in the case, then gather the data accordingly are first two important steps in the scenario analysis technique.this helps in the separation of the certainties and the uncertainties. According to after the observation of the case, the relevant scenarios are developed that are used in the planning of the better risk management process. The risk management strategy helps in building the better outcomes in the profit of the ortodon. The diversified effects of the risk in relation to the connection between the project returns and the firm’s returns. It can be seen that the EBIT of  Ortodon in2015 was $5,625 which later increased in the year 2016 by $6,214. The EBITDA of Ortodon in the year 2-015 was 10,889 which changes to 12,917 in the year 2016(Orton group , 2016). The application of the scenario analysis helps to maintain the transparency between the company and the customers. As stated by Smark & Mir (2017), better the transparency between the company and the consumer, the better profit is to be expected. The own business risk can be managed by the company using the strategy of the risk management in the scenario analyzing the process. This requires the skilled and expert employees that can be a limitation using in the company.

  Break-even analysis

As opined by Graham and Sathye (2017), break-even point is that point of the firm where the per unit cost of firm’s product is equal to that of per unit earned revenue of the firm, this highlights that in this point the firm’s total cost curve is equal to that of firm’s total revenue. In the general, it can be defined as the point where the firm earns revenue that is equal to that of its cost incurred on its per unit of production. According to Turner and Guilding (2013),the break-even point can be analyzed in order to find out the point where the firm can able to earn to cover up the cost of production of the firm. By analyzing this break-even point the management can reach the point where the firm can able to determine the safety margin for the firm, based on this the firm will fix the capital budgeting structure for the firm.

As stated by Waltersand Ramiah (2017), at the time of making the capital budgeting for the company it is important to include all the operating expenses along with the fixed and variable expenses at the time of preparing the capital budgeting based on breakpoint analysis. It had been observed that in cases of the above-mentioned company, Orotongroup annual report conveys the fact that while analyzing the total cost of production the firm had taken a cost of sales of firm’s products, warehousing and distribution expenses including the expenses of selling and administration and rent (Orton group, 2016). These expenses are to be taken into consideration as because the rent and warehouse expenses are considered as the fixed expenses of the firm and are to be incurred by the firm through the firm has no revenue earned for the year.

As opined by Regan et al. (2015),by doing the sum up of all the operating expenses and cost of direct labor and direct material as the variable cost of the firm and rent and warehouse expenses of the firm are to be deducted from the year’s earned revenue to analyze the safety margin of the firm. It had been observed that when the firm achieves the scale of economics the firm starts producing enough products and services to cover up the cost of production of the firm. As opined by (), it had been observed that when the firm starts to produce more numbers of units the firm’s per units will start to carry off the per UAD of the fixed cost of production thus leads to minimisation of the fixed cost of the firm. Aloof from this at the time of deciding the capital budgeting structure of the firm the firm use to deduct three types of cost from the cost of production including the fixed cost of production, semi-variable cost of production and variable cost of production of the firm’s prior year. From the annual report of OrotonGroup, it had been observed that in the year of 2016 the firm had paid total wages and salaries for $ 54,408,000 (AUD) (Orton group, 2016). This includes both the wages of officers salaries, labor wages and director’s remuneration this identifies the fact that at the time of calculation of break-even point of the firm based on which the firm can able to prepare the capital structure.

As opined by Smarkand Mir (2017),Simulation techniques model is defined as the computerized model that helps the internal management of the firm to imitate the real-time situation of the firm based on which the company can able to prepare the capital budgeting of the firm. This examining the real-time scenario includes the examining the short term and long term threats of the firm the existing competitors of the firm the current achieve target of the enterprise, it also includes the current market prices of the firm based on the market analysis of Australia. According to Robinson and Burnett (2016),this a computerized model that examines the real-time situation of the firm with the part record of the firm, this capital budgeting formation technique is considered as the more feasible in nature as it helps to analyze the fund’s requirements of large projects the firm will invest. This analysis is done based on the large project and comparing such company’s investment with the cash flow position of the firm that will help to analyze the return and risky investment of the company.

As opined by Turner and Guilding (2013), stimulation technique analyzing the rate of return on such invested capital on the investment of the firm with the process of stimulation technique the firm can able to relate the current market price of the firm that is required to analyse the time interest of the capital employed. It had been observed that OrotonGroup had invested $ 32,050,000 (AUD) in the year of 2016 prior to which the firm’s internal management had gone through various fair market price analysis of such investment to reach to the depth of the knowledge of analyzing the risk of such investment (Orton group, 2016).

Moreover, it had been observed by Robinson and Burnett (2016), with the help of doing stimulation analysis the firm can able to reach to the point of analyzing the net present value of such investment, that identifiers the differences in the present value with that of current cash inflow position of the firm.

After completing the above assignment to track the firm’s record with different techniques by which the capital budgeting structure of the firm can be determined. It had been observed that, the break-even point is that point of the firm where the per unit cost of firm’s product is equal to that of per unit earned revenue of the firm. This highlights that in this point the firm’s total cost curve is equal to that of firm’s total revenue, this helps in determining the safety margin of the firm. Whereas, Simulation techniques model is the computerized model that helps the internal management of the firm to imitate the real-time situation of the firm based on which the company can able to prepare the capital budgeting of the firm. In addition to this Scenario analysis is the technique of the scenario analysis is applied to understand the possible events of the future with considering the alternative possible outcomes. Moreover, sensitivity analysis of a company is the process based on which the different values of independent values impact the specific value with respect to the provided assumptions.

Reference list

Journals

Graham, P. J., & Sathye, M. (2017). Does National Culture Impact Capital Budgeting Systems?. Australasian Accounting Business & Finance Journal, 11(2).

Guerrero-Baena, M. D., Gómez-Limón, J. A., & Fruet Cardozo, J. V. (2014). Are multi-criteria decision making techniques useful for solving corporate finance problems? A bibliometric analysis. Revista de Métodos Cuantitativos para la Economía y la Empresa, 17, 60-79.

Regan, C. M., Bryan, B. A., Connor, J. D., Meyer, W. S., Ostendorf, B., Zhu, Z., & Bao, C. (2015). Real options analysis for land use management: Methods, application, and implications for policy. Journal of environmental management, 161, 144-152.

Turner, M. J., & Guilding, C. (2013). Capital budgeting implications arising from locus of hotel owner/operator power. International Journal of Hospitality Management, 35, 261-273.

Online articles

Robinson, C. J., & Burnett, J. R. (2016). Financial Management Practices: An Exploratory Study of Capital Budgeting Techniques in the Caribbean Region. Retrieved from: https://www.researchgate.net/profile/Carl_Robinson3/publication/309349307_Financial_Management_Practices_An_Exploratory_Study_of_Capital_Budgeting_Techniques_in_the_Caribbean_Region/links/580a309b08ae74852b52f772.pdf

Smark, C., & Mir, M. (2017). AABFJ Volume 11, Issue 2, 2017. Australasian Accounting, Business and Finance Journal, 11(2), 1-2. retrievd from: http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1785&context=aabfj

Walters, A., & Ramiah, V. (2017). Financial management or accounting: a theoretical analysis of the benefits and limitations of developing a’true’financial management approach within government agencies in Australia. Retrieved from: http://search.ror.unisa.edu.au/record/UNISA_ALMA51146388170001831/media/DIGITAL/open/9916130981901831/12146388130001831/13146388120001831/pdf

Annual report

Orton group (2016), Orton group annual report retrieved from: http://member.afraccess.com/media?id=CMN://2A981101&filename=20161028/ORL_01795534.pdf


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