fm12 25 - l. Are there problems with scenario analysis?...

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Mini Case: 12 - 25 l. Are there problems with scenario analysis? Define simulation analysis, and discuss its principal advantages and disadvantages. Answer: Scenario analysis examines several possible scenarios, usually worst case, most likely case, and best case. Thus, it usually considers only 3 possible outcomes. Obviously the world is much more complex, and most projects have an almost infinite number of possible outcomes. Simulation analysis is a type of scenario analysis which uses a relatively powerful financial planning software such as interactive financial planning system (IFPs) or @risk (a spreadsheet add-in). Simple simulations can also be conducted with other spreadsheet add-ins, such as Simtools. Here the uncertain cash flow variables (such as unit sales) are entered as continuous probability distribution parameters rather than as point values. Then, the computer uses a random number generator to select values for the uncertain variables on the basis of their designated distributions. Once all of the
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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