Question

Explain how the What-If Analysis tools available in Excel tools are used to assist with solid decision making. Give examples of how each of the What-If Analysis tools can be used practically.

Answer 1

What if analysis- Excel tool

What if analysis is a powerful Excel function which can be used by any firm for business planning and achieving its objectives. What if analysis helps in evaluation of different types of scenarios and perform sensitivity analysis. What if analysis is an important enabler for decision making and taking right decisions in an organization. It can also be used as a brainstorming technique to determine how projected future performance is affected by changes in the underlying assumption.

What if analysis that business can perform like:

• Evaluation of Capital Budgeting – calculate IRR, NPV, payback period, profitability index
• Budgeting Exercise - Setting budgets for different departments at beginning of the year
• New product launches- evaluation of new launches, costing, pricing ,etc
• Simulation analysis- perform simulation analysis for various scenarios
• Sensitivity analysis- for changes in underlying assumption like rate of interest, capital cost, etc
• Financial modeling for start ups

What if analysis in Capital Budgeting:

Let us take a practical scenario of performing What if analysis in Capital Budgeting. A Capital Budgeting is an important exercise undertaken by an organization for investment purpose. This involves huge capital cost and decisions once implemented are irreversible in nature. Hence what if analysis will help the firm in ensuring different scenarios are inbuilt in this exercise and right inputs are available for Decision making to managers

Business can evaluate Capital Budgeting in what if analysis in different scenarios. For example,

• What if tomorrow there is inflation in Capital Cost
• What if cash inflows will change in future period
• What if there are changes in working capital
• What if there is changes in underlying assumption like selling price, cost of launch etc
• What if there is changes in hurdle rate or cost of borrowing for capital investment

What if analysis helps in addressing the risks and uncertainties involved in running a business. The outcome of the analysis helps in making an informed and reliable decision making. What if analysis tool when used for sensitivity analysis can be a powerful technique for strategic management.