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

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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 variable values have been selected, they are combined, and an NPV is calculated. The
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern