Asked by moses munyai on Jul 16, 2024
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Consider the following statement by a project analyst: "I analyzed my project using scenarios for the base case, best case, and worst case. I computed break-evens and degrees of operating leverage. I did sensitivity analysis and simulation analysis. I computed NPV, IRR, payback, AAR, and PI. In the end, I have over a hundred different estimates and am more confused than ever. I would have been better off just sticking with my first estimate and going by my gut reaction.
Critique this statement.
Scenario Analysis
A method of evaluating potential future scenarios by contemplating various possible results, often used for strategic planning purposes.
Simulation Analysis
A statistical method that involves running multiple scenarios of a model in order to estimate the probability of different outcomes.
Sensitivity Analysis
A financial modeling tool used to evaluate how different values of an independent variable affect a particular dependent variable under a given set of assumptions.
- Comprehend the principle and procedure of scenario analysis.
- Comprehend the principle and its consequences linked to predicting risk in the allocation of capital resources.
- Elucidate the significance of having a contingency plan within the realm of financial management.
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Learning Objectives
- Comprehend the principle and procedure of scenario analysis.
- Comprehend the principle and its consequences linked to predicting risk in the allocation of capital resources.
- Elucidate the significance of having a contingency plan within the realm of financial management.
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