1993 Volume 2 Issue 1 Pages 47-70
Cash-flow-basis measures have been widely used for evaluating the profitability of capital investment plans. However, since the anticipated cash returns are uncertain, flexible sensitivity analyses with graphical representations are recommended.
In cases of strategic capital investment planning such as developing new products, entering new business areas and so on, the simplified assumption that the stream of net cash flows from each period are uniform would not lead to any practical solution. The sales volume or cash return varies greatly for each stage; introduction, growth, maturity, and declining stages of the project respectively. In addition, in strategic investment planning the degree of the uncertainty of market trends and competitive conditions, etc., is far greater than in ordinary investment projects; that is why more effective sensitivity analyses are needed.
This paper presents the graphic expression of sensitivity analyses which support management decision making regarding effective selection from among alternative capital investment plans having a non-uniform series of cash returns.
Section 1 presents an example of typical sensitivity analisis, assuming a uniform stream of cash returns, and suggests basic problems to be analyzed with regard to investment plans which have a non-uniform cash return. Section 2 proposes the introduction of substitute variables, adjusted annual value of sales volume (or revenue). It presents the method to formulate substitute variables in terms of the concepts of the “pattern of stream” and of the “type of risk.”
Section 3 focuses on the relationship between the adjusted annual value of sales volume and the net annual value of the investment plans. Finally, in section 4, numerical examples of a model company are introduced, and graphical break-even analyses are illustrated.
