Capital Budgeting and Sensitivity Analysis Paper
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In this assignment, Bigtime Conglomerate is making a decision to acquire BG Enterprises. The learner will review and modify, as necessary, the model for the Capital Budget and perform two sensitivity analyses of the data. The learner will write a paper that summarizes the changes in the model based on changes made, contrast the two analyses, correlate the purchase to internal competencies, and detail how the analyses affect the decision to acquire BG Enterprises.
General Requirements:
Use the following information to ensure successful completion of the assignment:
Refer to "Example of Capital Budgeting Model."
Refer to "Capital Budgeting Model."
This assignment requires that at least two additional scholarly research sources related to this topic, and at least one in-text citation from each source be included.
Directions:
Use the "Capital Budgeting Model" file and the instructions noted within the file to do the following:
1) Complete the capital budgeting model using "Capital Budgeting Model."
2) Perform two types of sensitivity analysis.
Write a paper (1,250-1,500 words) contrasting the sensitivity analysis types used, summarizing how results adjust, and detailing how your analyses affect decision making. Include the following in your paper:
1. Offer a research-based contrast of and rationale for the sensitivity analysis types used and the results achieved by each.
2. Summarize how the model results adjust to changes in key input variables.
3. Summarize market conditions that support or oppose the acquisition.
4. In your conclusion, detail how the data gathered affect the decision to acquire BG Enterprises.
I have finished this assignment on my own but I felt lost the entire time. My instructor is not readily available for help and I couldn't schedule a tutor before the paper is due. I just want something to compare my assignment to from someone that understands the instructions.
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Solution Summary
The solution provides an example of calculation of free cash flows, NPV and IRR calculation and sensitivity analysis for key variables for a proposed acquisition using the theories of capital budgeting. It also provides a writeup about the theory of capital budgeting, sensitivity analysis and the role of internal capabilities and market conditions in investment decisions.
Solution Preview
Sensitivity analysis of NPV based on growth rate of sales and the WACC as variables
I. Introduction to NPV method and sensitivity analysis
NPV analysis is a scientific capital budgeting tool that helps managers undertake complex investment decisions based on consideration of key market and economic variables. As per contemporary research, NPV analysis is the most preferred capital budgeting tool among CFOs worldwide (Graham et al., 2001)
Fig. 1: Popularity of different capital budgeting methods
Source: "The Theory and Practice of Corporate Finance: Evidence from the Field", Graham et al., Journal of Financial Economics, Vol. 60 (2001)
Sensitivity analysis provides a tool for the management to assess the impact of changes in key variables on the NPV of the acquisition, hence the decision with regard to the acquisition.
The variables that affect the NPV can be broadly categorized as broadly (or quasi) linear or non-linear variables, with variables that affect the inflows or outflows in a linear manner, such as growth rate of sales or prices, operating margins among others in a linear manner being assigned to the latter category. Variables such as the weighted average cost of capital (in turn affected by capital structure, market interest rates and tax rate), long term growth rate that cause non-linear changes in the NPV belong to the latter category.
Typically, decision makers build a base case using the most likely values of key parameters and develop a number of sensitivity scenarios around the base case to arrive at investment decisions.
Sensitivity analysis can help decision makers evaluate their investment decisions holistically in the following manners (Jonovic, 1999)
1. Help in identification of parameters that impact the NPV most significantly and hence, which require additional precision and clarity in estimation
2. Help generate scenarios for the ranges of critical parameters under which the NPV is projected to be positive as well as negative that would help in decision making
In the present case, NPV is seen as being broadly linearly dependent on the growth rate of number of cases with increase in NPV of about USD 1800 for one percent change in the growth rate. However, the change in NPV wrt ...
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