UNIT- III-T.

Y– Question Bank
What does capital investment mean?
Capital investment is a sum of money provided to a company to further its business objectives.
The term also can refer to a company's acquisition of long-term assets such as real estate,
manufacturing plants, and machinery.

Why is capital investment important?

Capital budgeting is extremely important to firms since capital investment projects make up
some of their most important financial investments. These projects often involve large amounts
of money and making poor capital investment decisions can have a disastrous effect on the
business.

What is capital and its significance?

 Meaning of Capital:
 Capital has been defined as that part of a person's wealth, other than land, which yields
an income or which aids in the production of further wealth. ... Capital serves as an
instrument of production.Anything which is used in production is capital.

What are examples of capital investments?

14 Examples of Capital Investment

 Land & Buildings. The purchase of land and buildings for your business.
 Construction. Any costs that go into constructing a building or structure is a capital
investment.
 Landscaping. Productive changes to land such as an irrigation system for a farm.
 Improvements. ...
 Furniture & Fixtures. ...
 Infrastructure. ...
 Machines. ...
 Computing.


 What is difference between capital and investment?

 Capital is source of funds, while investment is deployment of funds. Capital shown in
the liabilities side of the balance sheet, but Investment shown the assest side of the
balance sheet. ... Capital account represent the paid up capital of share, reserve and
surplus.
What are types of capital investments?
There are four main investment types, or asset classes, that you can choose from, each with
distinct characteristics, risks and benefits.

 Growth investments.
 Shares.
 Property.
 Defensive investments.
 Cash investments include everyday bank accounts, high interest savings accounts and
term deposits.
 Fixed interest.


What are the different types of capital investments?

The following are common types of capital investment.

 Land & Buildings. The purchase of land and buildings for your business.
 Construction. Any costs that go into constructing a building or structure is a capital
investment.
 Landscaping. ...
 Improvements. ...
 Furniture & Fixtures. ...
 Infrastructure. ...
 Machines. ...
 Computing.


 What is a capital investment example?

 Definition of Capital Investment
 Capital investment is having enough cash, loans or assets to fund a company's
operations. Banks, investors, financial institutions, angel investors and venture capitalists
are all sources of capital investment. ... This is just one of many examples of capital
investment need.Aug 28, 2018

What are the sources of capital?
Sources of capital

 Long term – usually above 7 years. Share Capital. Mortgage loan. Retained Profit. Venture
capital. Debenture. ...
 Medium term – usually between 2 and 7 years. Term Loans. Revenue-based financing. Leasing.
Hire Purchase.
 Short term – usually under 2 years. Bank Overdraft. Trade credit. Deferred Expenses. Factoring.
  What are the sources of finances?
 Sources of finance for business are equity, debt, debentures, retained earnings, term
loans, working capital loans, letter of credit, euro issue, venture funding etc. These
sources of funds are used in different situations. They are classified based on time period,
ownership and control, and their source of generation.

What are the 5 sources of finance?

The 5 Most Common Funding Sources

1. Funding from Personal Savings. Funding from personal savings is the most common type
of funding for businesses. ...
2. Debt Financing. Debt financing is a fancy way of saying “loan.” ...
3. Friends & Family. A big source of funding for entrepreneurs is friends and family. ...
4. Angel Investors. ...
5. Venture Capitalists (VCs)
6.

What are the Objectives of Capital Investment?

Objectives of Capital Investment

 To acquire additional capital assets for expansion, enabling the business to, for example,
increase unit production, create new products, or add value;
 To take advantage of new technology or advancements in equipment or machinery to
increase efficiency and reduce costs.
 Working Capital
Requirements
Working Capital Requirement. The Working Capital Requirement of a business is the sum
of current assets or the amount of funds necessary to cover the cost of operating expenses of the
business. The two main components of working capital are current assets and current
liabilities.Jul 14, 2016

Working Capital is short term in nature, i.e. stock of raw materials, semi finished goods, finished goods,
trade debtors, cash and bank balances. The amount of working capital will vary from time to time
depending the speed of the business done. The Accounting Term of the working capital is Current
Assets.

What Is Working Capital?

Working capital, also known as net working capital (NWC), is the difference between a
company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and
inventories of raw materials and finished goods, and its current liabilities, such as accounts
payable. Net operating working capital is a measure of a company's liquidity and refers to the
difference between operating current assets and operating current liabilities. In many cases these
calculations are the same and are derived from company cash plus accounts receivable plus
inventories, less accounts payable and less accrued expenses.

Working capital is a measure of a company's liquidity, operational efficiency and its short-term
financial health. If a company has substantial positive working capital, then it should have the
potential to invest and grow. If a company's current assets do not exceed its current liabilities,
then it may have trouble growing or paying back creditors, or even go bankrupt.

Key Takeaways

 A company has negative working capital If the ratio of current assets to liabilities is less than
one.
 Positive working capital indicates that a company can fund its current operations and invest in
future activities and growth.
 High working capital isn't always a good thing. It might indicate that the business has too much
inventory or is not investing its excess cash.
What is the concept of working capital?
Meaning: In an ordinary sense, working capital denotes the amount of funds needed for
meeting day-to-day operations of a concern. ... Hence it deals with both, assets and liabilities—in
the sense of managing working capital it is the excess of current assets over current liabilities.

What is working capital give example?

Cash, inventory, accounts receivable and cash equivalents are some of the examples of the
working capitals. ... These are the money a corporation has in its bank account as well as the
assets it can convert to cash if needed. Some of the examples of the working capitals are
inventory, cash etc.May 10, 2017

What are the 4 main components of working capital?

They are several main components of working capital management. For example: cash,
inventory, accounts receivable, trade credits, marketable securities, loans, Insurances etc.
...
Components of Working Capital Management:

 Cash / Money: ...

 Account Receivable: ...
 Account Payable: ...
 Stock / Inventory:


 What is a good working capital ratio?

 A working capital ratio of less than 1.0 is a strong indicator that there will be liquidity
problems in the future, while a ratio in the vicinity of 2.0 is considered to represent good
short-term liquidity. To calculate the working capital ratio, divide all current assets by
all current liabilities.May 13, 2017


 Is working capital a cash?

 Working capital in valuation. We will back out cash and investments in marketable
securities from current assets. ... Unlike inventory, accounts receivable and other current
assets, cash then earns a fair return and should not be included in measures of working
capital.


 Can working capital be negative?

 Negative working capital is when a company's current liabilities exceed its current
assets. ... This assures the buyer that the company can generate sufficient cash over the
short term to cover supplier and payroll obligations.
 What affects working capital?
 Examples of Changes in Working Capital
 Therefore working capital will increase. If a company uses its cash to pay for a new
vehicle or to expand one of its buildings, the company's current assets will decrease with
no change to current liabilities. Therefore working capital will decrease.
 Project cash flow projections and
statement
A projected cash flow statement is used to evaluate cash inflows and outflows to deter.
... A projected cash flow statement is best defined as a listing of expected cash inflows
and outflows for an upcoming period (usually a year.

What is cash flow in construction project?

In very general terms, 'cash flow' is the movement of income into and expenditure out of a
business (or other entity) over time. ... In construction, however, the term 'cash flow' typically
refers to an analysis of when costs will be incurred and how much they will amount to during the
life of a project.Jul 8, 2019

How do you do a cash flow projection?

1. Prepare the income or sales for the business — a sales forecast. ...
2. Prepare detail on any other estimated cash inflows. ...
3. Prepare detail on all estimated cash outflows and expenses. ...
4. Prepare your cash flow forecast by putting all the gathered detail together. ...
5. Review your estimated cash flows to actual.

What is the purpose of a cash flow projection?

Estimate of the timing and amounts of cash inflows and outflows over a specific period
(usually one year). A cash flow forecast shows if a firm needs to borrow, how much,
when, and how it will repay the loan. Also called cash flow budget or cash flow
projection.

What is an inflow of cash?

Cash inflow is the money going into a business. That could be from sales, investments or
financing. It's the opposite of cash outflow, which is the money leaving the business. A business
is considered healthy if its cash inflow is greater than its cash outflow.

Why is cash flow so important?

Cash is also important because it later becomes payment for things that make your business
run: expenses like stock or raw materials, employees, rent and other operating expenses.
Naturally, positive cash flow is preferred. ... Conversely, there's negative cash flow: more
money paying out out than being coming in.Feb 17, 2014

Cash flow in construction

Contents
[hide]

 1 Client cash flow

 2 Contractor cash flow
 3 Supply chain cash flow
 4 Related articles on Designing Buildings Wiki

Client cash flow

In very general terms, 'cash flow' is the movement of income into and expenditure out of a
business (or other entity) over time. If more money is coming into the business than is going out
of it, cash flow is said to be 'positive'. If more money is going out, this is negative cash flow.

In construction, however, the term 'cash flow' typically refers to an analysis of when costs will be
incurred and how much they will amount to during the life of a project.

Predicting cash flow is important in order to ensure that an appropriate level of funding is in
place and that suitable draw-down facilities are available.

Until the main contractor has been appointed, cash flow projections are likely to be based only
on agreed fee payment schedules for consultants and a simple division of the construction cost
over the likely construction period (or perhaps an allocation of construction cost over an s-curve
distribution). It is only when the main contractor is appointed, a master programme prepared and
some form of payment schedule agreed that cash flow projections become reliable.

Cash flow projections may be affected by the need for the early purchase of long-lead time items
or by items that the client may wish to purchase that are outside of the main contract (such as
furniture or equipment).

Contractor cash flow

Contractors have to have money coming in to pay suppliers and subcontractors and for the day-
to-day running of the business.
Carillion's cash flow was very low, leading to their liquidation in January 2018. At the start of
any contract, a payment scheme or table is drawn and agreed with the client or their quantity
surveyor, e.g.:

Cash flow statement

In very general terms, 'cash flow' is the movement of income into and expenditure out of a
business (or other entity) over time. If more money is coming into the business than is going out
of it, cash flow is said to be 'positive'. If more money is going out, this is negative cash flow.

In construction however, the term 'cash flow' typically refers to an analysis of when costs will be
incurred and how much they will amount to during the life of a project.

A cash flow statement (or statement of cash flows), is a reporting mechanism used to show the
amount of cash (and cash equivalents) going in (cash inflow) and out (cash outflow) of a
business or project. In basic terms, the cash flow statement sets out the extent to which the
business or project has enough cash to fund its operating expenses and meet its debt obligations.

In accounting, the cash flow statement is often used to complement the balance sheet and
income statement, and is helpful for determining short-term viability. It also helps provide an
indication of the amount and timing of future cash flows.

The cash flow statement is typically split into three areas:

 Cash flow from operating activities (production, sales, delivery, purchasing, shipping, and so on).
 Cash flow from investing activities (purchase or sale of assets, loans made or received, payments
related to mergers and acquisition).
 Cash flow from financing activities (inflow from investors, outflow as dividends to shareholders,
and so on).
Guidance is available from RICS about cash flow forecasting in the construction industry.
http://www.rics.org/uk/knowledge/professional-guidance/black-book/cash-flow-forecasting-1st-
edition-black-book/

Balance Sheet
What is B/S?

Balance sheet

This article provide a brief introduction to balance sheets.

The balance sheet of any business, whether it is a company, a partnership or a sole trader, is
simply a statement, or list, of assets and liabilities at a given date.

Typically assets will include such items as:

 Cash in the bank.

 Money owed to the business in the form of debtors.
 Stock.
 Tangible assets such as; computers, equipment and furniture.

Liabilities will include such items as:

 Net overdraft at the bank.

 Money owed to suppliers in the form of trade creditors.
 Loans to the business.
 Hire purchase contracts.
 Money owed to HMRC in the form of VAT or other taxes.
 Share capital and accumulated reserves (these are amounts invested or retained in the business
by its owners).

And in addition to the obvious items above, accounting practice allows for many other categories
to be accounted for, such as:

 Prepayments.
 Accrued income.
 Accruals, etc.

There are timing considerations to be taken into account when listing these items out. The
Companies Acts require that liabilities are identified by reference to when they fall due to be
paid, so that it can be seen if a business’s immediate payment obligations to creditors exceeds its
short-term ability to find the cash to meet those obligations.

It is for this reason that balance sheets of entities who report to Companies House will show
'current assets' and 'current liabilities' and will also show whether current assets exceed current
liabilities (good) or whether current liabilities exceed current assets (bad).

In fact, the Companies Acts stipulate the broad formats in which accounts, including the Balance
Sheet, must be presented. There are a variety of reporting options depending upon the nature and
size of the business in question and guidance is available from Companies House.

Not only is it good business practice to have this information readily available, but it is also
information that lenders or statutory bodies will be interested in as the balance sheet is
effectively a record of a business’s life since birth; how much profit has been retained in the
business over the years and how healthy it now looks. And because balance sheets are published
once a year, usually to the same accounting date, it is possible to see a progression year by year
in the net asset value of a business.

Not all businesses are legally required to prepare a balance sheet. Unincorporated businesses that
do not have to file accounts with Companies House do not need to do so. It is, nonetheless, good
practice to ensure that a balance sheet is maintained and is up to date. Many businesses are
wound up because they cannot pay their debts when they fall due (effectively this is the
definition of insolvency), and this often arises because business owners have lost track of exactly
what they owe, particularly to HMRC in the form of VAT, PAYE or Corporation Tax.

In addition to the balance sheet itself, published accounts frequently contain 'Notes to the
Balance Sheet' which, to the experienced practitioner, is where much of the essential detail which
lies behind the bare numbers can be found.

When considered together with the annual profit and loss account, the balance sheet should
provide an accurate snapshot of a business’s well-being at a given point in time.

Balance Sheet – Importance, Sample Format, Requirements

Updated on Nov 27, 2019 - 12:38:21 PM

Balance Sheet is part of any financial statement which provides a snapshot of entity’s financial
condition on a given date.

o What is Balance Sheet?

o Importance of Balance Sheet
o Sample Format of Balance Sheet
o MCA Compliance Requirement
 o Detailed note on Sections and Sub-Sections

What is Balance Sheet?

Balance Sheet is part of any financial statement which provides the financial condition on a
given date. An entity’s balance sheet provides a lot of information which can be used to analyze
the financial stability and business performance. The balance sheet is a report version of
the accounting equation that is balance sheet equation where assets always equate liabilities plus
shareholder’s capital. Investors and creditors generally look at the balance sheet and infer as to
how efficiently a company can use its resources and how effectively it can finance them.

The three important sections of any balance sheet are:

 Assets – Anything that has value and owned by a company

 Liabilities – This provides a list of debts a company owes to others
 Capital or Equity- This is the amount invested by the Shareholders

Importance of Balance Sheet

Balance sheet analysis can reveal a lot of important information about a company’s performance.
Importance of balance sheet is listed below:

 It is an important tool used by the investors, creditors and other stakeholders to understand the
financial health of an entity.
 The growth of an organization can be known by comparing the balance sheet of different years.
 It is an essential document required to be submitted to the bank to obtain a business loan.
 Stakeholders can understand the business performance and liquidity position of the entity.
 Ability to undertake expansion projects and meet unforeseen expenses can be determined by
analyzing a company’s balance sheet
 If the company is funding its operations with profit or debt can be known

Profit and Loss Statement (P&L) Definition -
- The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and
expenses incurred during a specified period, usually a fiscal quarter or year. ... Some refer to the P&L
statement as a statement of profit and loss, income statement, statement of ...

What is profit or loss account?

A profit and loss account shows a company's revenue and expenses over a particular period of
time, typically either one month or consolidated months over a year. ... The profit and loss
account represents the profitability of a business.

How do you prepare a profit and loss account?

Preparing a Periodic Profit and Loss Statement

1. First, show your business net income (usually titled "Sales") for each quarter of the year. ...
2. Then, itemize your business expenses for each quarter. ...
3. Then show the difference between Sales and Expenses as Earnings.

What is debit and credit?

A debit is an accounting entry that either increases an asset or expense account, or
decreases a liability or equity account. It is positioned to the left in an accounting entry. A
credit is an accounting entry that either increases a liability or equity account, or
decreases an asset or expense .
 Risk management
What is risk management in simple words?

Risk management is the process of identifying, assessing and controlling threats to an

organization's capital and earnings. These threats, or risks, could stem from a wide variety of
sources, including financial uncertainty, legal liabilities, strategic management errors, accidents
and natural disasters.
What is the purpose of risk management?
The purpose of risk management is to identify potential problems before they occur so that
risk-handling activities may be planned and invoked as needed across the life of the product or
project to mitigate adverse impacts on achieving objectives.

What are the five steps in risk management process?

Five Steps of the Digital Risk Management Process

1. What is the risk management process? ...

2. Step 1: Identify the Risk. ...
3. Step 2: Analyze the risk. ...
4. Step 3: Evaluate or Rank the Risk. ...
5. Step 4: Treat the Risk. ...
6. Step 5: Monitor and Review the risk. ...
7. The basics of the risk management process stay the same. ...
8. About the company.

What are risk management techniques?

9. There are five different techniques you can use to manage risk: Avoiding Risk,
Retaining Risk, Spreading Risk, Preventing and Reducing Loss, and Transferring Risk.

What are the 5 major categories of control measures?

5 best risk assessment control measures

1. Elimination. We have already discussed this earlier on in this post, and elimination
should always be the first control measure you consider. ...
2. Substitution. Substitution is the second best control measure you could use. ...
3. Engineering controls. ...
4. Administrative controls. ...
5. Personal protective clothes and equipment.
What are the 3 types of risk?
The Main Types of Business Risk

 Strategic Risk.
 Compliance Risk.
 Operational Risk.
 Financial Risk.
 Reputational Risk.

How do you identify risks?

Here are seven of my favorite risk identification techniques:

1. Interviews. Select key stakeholders. ...

2. Brainstorming. I will not go through the rules of brainstorming here. ...
3. Checklists. ...
4. Assumption Analysis. ...
5. Cause and Effect Diagrams. ...
6. Nominal Group Technique (NGT). ...
7. Affinity Diagram.

Risk control,
7 Risk control, also known as hazard control, is a part of the risk management process
in which methods for neutralising or reduction of identified risks are implemented.
Controlled risks remain potential threats, but the probability of an associated incident
or the consequences thereof have been significantly reduced.
What are three examples of risk control in a service?
The following are common examples.

 Inspections. Infrastructure risks are reduced with a process of regular inspections.

 Maintenance. ...
 Testing. ...
 Due Diligence. ...
 Automation. ...
 Systems. ...
 System Validation. ...
 Physical.

What is risk monitoring and control?

Risk monitoring and control is the process of identifying, analyzing, and planning for newly
discovered risks and managing identified risks. Throughout the process, the risk owners track
identified risks, reveal new risks, implement risk response plans, and gage the risk response
plans effectiveness.Mar 29, 2007

What are risk and controls?

Risk control is the set of methods by which firms evaluate potential losses and take action to
reduce or eliminate such threats. ... Risk control thus helps companies limit lost assets and
income. Risk control is a key component of a company's enterprise risk management (ERM)
protocol.Aug 12, 2019

What are the tools of controlling?

Control Techniques - 10 Types of Techniques of Controlling

 Direct Supervision and Observation. 'Direct Supervision and Observation' is the oldest technique
of controlling. ...
 Financial Statements. ...
 Budgetary Control. ...
 Break Even Analysis. ...
 Return on Investment (ROI) ...
 Management by Objectives (MBO) ...
 Management Audit. ...
 Management Information System (MIS)
  What is a risk monitoring?
 Risk monitoring is the process which tracks and evaluates the levels of risk in an
organisation. ... The findings which are produced by risk monitoring processes can be
used to help to create new strategies and update older strategies which may have proved
to be ineffective.

What are the 3 types of internal controls?

There are three main types of internal controls: detective, preventative and corrective.

 Detective Internal Controls. Detective internal controls are designed to find errors after
they have occurred. ...
 Preventative Internal Controls. ...
 Corrective Internal Controls. ...
 Limitations.
 What is risk prevention?
 Risk prevention is the process of avoiding risk or reducing the probability and impact of
risk.Jun 18, 2018
 What are modern techniques of controlling?
 Traditional Techniques of Managerial Control
 These include: Personal observation. Statistical reports. Break-even analysis.


What are the techniques of controlling?

Control Techniques - 10 Types of Techniques of Controlling

 Direct Supervision and Observation. 'Direct Supervision and Observation' is the oldest
technique of controlling. ...
 Financial Statements. ...
 Budgetary Control. ...
 Break Even Analysis. ...
 Return on Investment (ROI) ...
 Management by Objectives (MBO) ...
 Management Audit. ...
 Management Information System (MIS)
 What is meant by controlling?
 Control, or controlling, is one of the managerial functions like planning, organizing,
staffing and directing. ... Control in management means setting standards, measuring
actual performance and taking corrective action.
What are the characteristics of controlling?
Characteristics of Control:

 Control is a Managerial Process: ...

 Control is forward looking: ...
 Control exists at each level of Organization: ...
 Control is a Continuous Process: ...
 Control is closely linked with Planning: ...
 Purpose of Controlling is Goal Oriented and hence Positive: ...
 Establish the Standards: ...
 Measure Actual Performance:

Mo

What is controlling and why is it important?

Controlling is the managerial functions of planning, staffing, organizing, implementing and
directing. It helps to check the errors and take the corrective action, so it is known as an
important function of management. It is necessary to ensure that the desired results are
achieved.
What are the advantages of controlling?
Ensures order and discipline:
Control creates an atmosphere of order and discipline in the organisation. Effective controlling
system keeps the subordinates under check and makes sure they perform their functions
efficiently. Sharp control can have a check over dishonesty and fraud of employees.

What is the main purpose of a control?

A scientific control is an experiment or observation designed to minimize the effects of variables
other than the independent variable. This increases the reliability of the results, often through a
comparison between control measurements and the other measurements.
 Sensitivity analysis
Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model
or system (numerical or otherwise) can be divided and allocated to different sources of
uncertainty in its inputs.

How do you perform a sensitivity analysis?

Use the sensitivity analysis to evaluate the effects of the input variation on the output
variation.

1. Choose Simulation > Sensitivity Analysis.

2. If you have more than one output, a drop-down list appears so that you can choose the
output that you want to examine.
3. Examine the graph. Look for inputs that have sloped line

Why is a sensitivity analysis important?

4. The Purpose of Sensitivity Analysis
5. The sensitivity analysis serves following purposes: It helps in identifying the key
variables that are major influence in the cost and benefits of the project. Demands,
expenses, operating costs and legal costs, revenues and financial benefits are included in
this stage.

Sensitivity analysis is the quantitative risk assessment of how changes in a specific model
variable impacts the output of the model. ... Often referred to as a Tornado chart, sensitivity
analysis shows which task variables (Cost, Start and Finish Times, Duration, etc) have the
greatest impact on project parameters.

What is sensitivity analysis in project management?

Sensitivity analysis is one such method. It is implemented to analyze the various risks to the
project by looking at all aspects of the project and their potential impact on the overall goal. ...
Project management can easily convey the results of a sensitivity analysis through the use of a
tornado diagram.
What is sensitivity analysis and what is its purpose?
Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model
or system (numerical or otherwise) can be divided and allocated to different sources of
uncertainty in its inputs. ... Increased understanding of the relationships between input and
output variables in a system or model.

Sensitivity analysis
1. 1. SensitivityAnalysis IT Risk Management
2. 2. Outline…. What is Sensitivity Analysis in Project Risk Management? Example on Sensitivity
Analysis…. Types of Sensitivity Analysis…… Advantages & Disadvantages
3. 3. What is Sensitivity Analysis?...... Sensitivity analysis is also called What-if analysis
Sensitivity analysis is the assessment of the impact for an output of a system by changing its
inputs
4. 4. Example on Sensitivity Analysis….. In budgeting process there are always variables that are
uncertain such as Sensitivity analysis answers the question, "if these variables deviate from
expectations, what will the effect be (on the business, model, system, or whatever is being
analyzed), and which variables are causing the largest deviations?" interest rates Future tax
rates inflation rates other variables may not be known with great precision
5. 5. Types of Sensitivity Analysis…. Partial Sensitivity Analysis In a partial sensitivity analysis, you
select one variable, change its value while holding the values of other variables constant. Best-
case and worst-case scenarios Best- and worst-case scenarios establish the upper (best-case)
and lower (worst-case) boundaries of a cost-benefit study’s results. This type of sensitivity
analysis shows how a broad range of a program or policy’s possible outcomes affect the bottom
line.
6. 6. Cont.… To Perform Worst Case Analysis Best Case Analysis Use all of the most-favorable
assumptions Use all of the least- favorable assumptions
7. 7. Cont.… Break-even analysis If you are unable to estimate a policy’s most likely effects or
cannot find comparable studies to help determine its best-case and worst-case scenarios, you
can use
8. 8. Cont.… Monte Carlo analysis You can use Monte Carlo analysis to examine multiple
variables simultaneously and simulate thousands of scenarios, resulting in a range of possible
outcomes and the probabilities that they will occur.
9. 9. Advantages Simplicity Directing Management Efforts Ease of being Automated As a
quality Check
10. 10. Disadvantages It does not provide clear cut results Not a solution in standalone form
 Break-even analysis
A break-even analysis is a financial tool which helps you to determine at what stage your
company, or a new service or a product, will be profitable. In other words, it's a financial
calculation for determining the number of products or services a company should sell to cover its
costs (particularly fixed costs).Nov 27, 2019

Operations: Introduction to Break-even Analysis

 Levels: AS, A Level

 Exam boards: IB

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Break-even analysis is a technique widely used by production management and management

accountants. It is based on categorising production costs between those which are "variable"
(costs that change when the production output changes) and those that are "fixed" (costs not
directly related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to determine the level of
sales volume, sales value or production at which the business makes neither a profit nor a
loss (the "break-even point").

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at various levels
of activity shown on the same chart as the variation of income (or sales, revenue) with the same
variation in activity. The point at which neither profit nor loss is made is known as the "break-
even point" and is represented on the chart below by the intersection of the two lines:

In the diagram above, the line OA represents the variation of income at varying levels of
production activity ("output"). OB represents the total fixed costs in the business. As output
increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At
low levels of output, Costs are greater than Income. At the point of intersection, P, costs are
exactly equal to income, and hence neither profit nor loss is made.
Fixed Costs

Fixed costs are those business costs that are not directly related to the level of production or
output. In other words, even if the business has a zero output or high output, the level of fixed
costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of
investment in production capacity (e.g. adding a new factory unit) or through the growth in
overheads required to support a larger, more complex business.

Examples of fixed costs:

- Rent and rates
- Depreciation
- Research and development
- Marketing costs (non- revenue related)
- Administration costs

Variable Costs

Variable costs are those costs which vary directly with the level of output. They represent
payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs
such as commission.

A distinction is often made between "Direct" variable costs and "Indirect" variable costs.

Direct variable costs are those which can be directly attributable to the production of a particular
product or service and allocated to a particular cost centre. Raw materials and the wages those
working on the production line are good examples.

Indirect variable costs cannot be directly attributable to production but they do vary with output.
These include depreciation (where it is calculated related to output - e.g. machine hours),
maintenance and certain labour costs.

Semi-Variable Costs

Whilst the distinction between fixed and variable costs is a convenient way of categorising
business costs, in reality there are some costs which are fixed in nature but which increase when
output reaches certain levels. These are largely related to the overall "scale" and/or complexity of
the business. For example, when a business has relatively low levels of output or sales, it may
not require costs associated with functions such as human resource management or a fully-
resourced finance department. However, as the scale of the business grows (e.g. output, number
people employed, number and complexity of transactions) then more resources are required. If
production rises suddenly then some short-term increase in warehousing and/or transport may be
required. In these circumstances, we say that part of the cost is variable and part fixed.
 Simulation analysis in risk management
Risk analysis is part of every decision we make. ... Monte Carlo simulation (also known as the
Monte Carlo Method) lets you see all the possible outcomes of your decisions and assess the
impact of risk, allowing for better decision making under uncertainty.

What is a simulation analysis?

Definition: The Simulation Analysis is a method, wherein the infinite calculations are made to
obtain the possible outcomes and probabilities for any choice of action. The concept of
simulation analysis can be further comprehended through the following steps: The first step is
to model the project.
What is simulation and analysis?
Simulation Analysis. Definition: The Simulation Analysis is a method, wherein the infinite
calculations are made to obtain the possible outcomes and probabilities for any choice of action.

What is risk management simulation?

Risk management applications require simulation experiments. ... Scenario analysis of risk
management refers to simulating possible scenarios to analyze the risk of a decision and
consequences. The ultimate goal of a scenario analysis may be to reach a decision, to verify a
model, or to validate a certain conjecture.May 1, 2015

What is the purpose of using simulation analysis?

Simulation is one way of dealing with the uncertainty involved in forecasting the outcomes of
capital budgeting projects or other types of decisions. A Monte Carlo simulation model uses
random variables for inputs.

Why are simulations effective?

Learning simulations are cost-effective tools to standardize content that aims to change the
learners' behavior. Learners can practice, repeatedly, in a controlled environment. They can make
mistakes and learn from them. They can experiment with new ways to deal with the same
solution.Sep 20, 2017

Why are Monte Carlo simulations used in program schedule

analysis?
The Monte Carlo simulation method has many benefits in project management, such as: It
helps you evaluate the risk of the project. It helps you predict chances of failure, and schedule
and cost overrun. It converts risks into numbers to assess the risk impact on the project objective.
What are the advantages of simulation?
Advantages of Simulation. One of the primary advantages of simulators is that they are able to
provide users with practical feedback when designing real world systems. This allows the
designer to determine the correctness and efficiency of a design before the system is actually
constructed.
What are the applications of simulation?
Simulation is used in many contexts, such as simulation of technology for performance optimization,
safety engineering, testing, training, education, and video games. Often, computer experiments are used
to study simulation models.

Decision Tree
Analysis.
Decision Tree Analysis. Definition: The Decision Tree Analysis is a schematic representation of several
decisions followed by different chances of the occurrence. ... These decisions are followed by the
chance points, represented by circles, are the uncertain points, where the outcomes are dependent on
the chance process.

Decision Tree Analysis

Definition: The Decision Tree Analysis is a schematic representation of several decisions

followed by different chances of the occurrence. Simply, a tree-shaped graphical representation
of decisions related to the investments and the chance points that help to investigate the possible
outcomes is called as a decision tree analysis.
Define Decision Tree Analysis.
The decision tree shows Decision Points, represented by squares, are the
alternative actions along with the investment outlays, that can be undertaken
for the experimentation. These decisions are followed by the chance points,
represented by circles, are the uncertain points, where the outcomes are
dependent on the chance process. Thus, the probability of occurrence is
assigned to each chance point.

Once the decision tree is described precisely, and the data about outcomes
along with their probabilities is gathered, the decision alternatives can be
evaluated as follows:

1. Start from the extreme right-hand end of the tree and start calculating NPV for each
chance points as you proceed leftward.
2. Once the NPVs are calculated for each chance point, evaluate the alternatives at the
final stage decision points in terms of their NPV.
3. Select the alternative which has the highest NPV and cut the branch of inferior
decision alternative. Assign value to each decision point equivalent to the NPV of the
alternative selected.
4. Again, repeat the process, proceed leftward, recalculate NPV for each chance point,
select the decision alternative which has the highest NPV value and then cut the
branch of the inferior decision alternative. Assign the value to each point equivalent
to the NPV of selected alternative and repeat this process again and again until a final
decision point is reached.
Thus, decision tree analysis helps the decision maker to take all the possible
outcomes into the consideration before reaching a final investment decision

What are the steps in decision tree analysis?

In a decision tree analysis, the decision-maker has usually to proceed through the following
six steps:

 Define the problem in structured terms. ...

 Model the decision process. ...
 Apply the appropriate probability values and financial data. ...
 “Solve” the decision tree. ...
 Perform sensitivity analysis.

. What is decision tree and example?

The leaves are the decisions or the final outcomes. And the decision nodes are where the data is
split. An example of a decision tree can be explained using above binary tree. ... There are two
main types of Decision Trees: Classification trees (Yes/No types)Sep 7, 2017

What are the advantages of decision trees?

A significant advantage of a decision tree is that it forces the consideration of all possible
outcomes of a decision and traces each path to a conclusion. It creates a comprehensive analysis
of the consequences along each branch and identifies decision nodes that need further analysis.
 Risk identification analysis
and mitigation of project risk
INTRODUCTION. The ultimate purpose of risk identification and analysis is to
prepare for risk mitigation. Mitigation includes reduction of the likelihood that a
risk event will occur and/or reduction of the effect of a risk event if it does occur.

What is risk assessment and mitigation?

Risk Management and Risk Mitigation is the process of identifying, assessing,
and mitigating risks to scope, schedule, cost and quality on a project. Risks come
in the form of opportunities and threats and are scored on probability of occurrence
and impact on project.
What is risk identification in project management?
Fundamental Steps of Risk Management [2] The objective of risk identification is the early
and continuous identification of events that, if they occur, will have negative impacts on the
project's ability to achieve performance or capability outcome goals. They may come from
within the project or from external sources.

Whats is mitigation?
Definition of 'Mitigation' Definition: Mitigation means reducing risk of loss from the
occurrence of any undesirable event. This is an important element for any insurance business so
as to avoid unnecessary losses. Description: In general, mitigation means to minimize degree of
any loss or harm.

What is mitigation of risk?

Risk mitigation is a strategy to prepare for and lessen the effects of threats faced by a data
center. Comparable to risk reduction, risk mitigation takes steps to reduce the negative effects
of threats and disasters on business continuity (BC).Jun 29, 2018

What are examples of mitigation?

For example, to protect against sea level rise and increased flooding, communities might build
seawalls or relocate buildings to higher ground. Mitigation involves attempts to slow the process
of global climate change, usually by lowering the level of greenhouse gases in the atmosphere.

What are the types of mitigation?

The primary types of mitigation actions to reduce long-term vulnerability are:
  Local plans and regulations.
 Structural projects.
 Natural systems protection.
 Education programs.


What are the 4 ways to manage risk?

There are 5 main ways to manage risk: acceptance, avoidance, transference, mitigation or
exploitation. Here's a detailed look at each of them.
...
5 Ways To Manage Risk

 Accept The Risk. ...

 Avoid The Risk. ...
 Transfer The Risk. ...
 Mitigate The Risk. ...
 Exploit The Risk

 Why is risk management important?

 Risk management is important in an organisation because without it, a firm cannot
possibly define its objectives for the future. ... The whole goal of risk management is to
make sure that the company only takes the risks that will help it achieve its primary
objectives while keeping all other risks under control.Aug 15, 2013


What is significance of mitigation?

Mitigation is significant in the following ways: 1.It helps in preventing loss of lives during
disasters. 2.It heps in controlling economic damages and losses to property. 3.It helps in
minimising the long term after-effects of a disaster that have their impact on society.Mar 18,
2017
Role of insurance in risk
management
Insurance enables to manage loss, financial stability and promotes trade and
commerce activities. Those results in economic growth and development.
Insurance plays a crucial role in the sustainable growth of an economy. Medical
insurance is considered as an essential element in managing risk in health.