Capital Rationing Question:
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Tell me what methods are used to ascertain the risk in capital budgeting decisions?

Answer:

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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