Business – 10.3 Investment appraisal – Investment appraisal decisions | e-Consult
10.3 Investment appraisal – Investment appraisal decisions (1 questions)
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Answer:
- Sensitivity analysis tests how changes in key variables (e.g., sales volume, cost of goods sold, discount rate) affect outcomes like NPV or ROI. By identifying the most critical inputs, investors can assess risk exposure and decide whether the venture’s profitability is robust or fragile.
- Scenario planning creates distinct sets of assumptions (optimistic, base, pessimistic). Comparing the financial results of each scenario shows the range of possible returns and highlights best‑case and worst‑case outcomes.
- Both techniques provide quantitative evidence that:
- Highlights variables that require close monitoring or mitigation.
- Supports the setting of contingency budgets or risk‑adjusted discount rates.
- Enables more informed go/no‑go decisions by showing whether the expected return justifies the risk.
- Overall, they shift investment decisions from intuition‑based judgments to evidence‑based assessments, increasing confidence in the chosen strategy.