Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
Define (a) sensitivity analysis, (b) scenario analysis, and (c) simulation analysis. If GE were considering two projects (one for $500 million to develop a satellite communications system and the other for $30,000 for a new truck), on which would the company be more likely to use a simulation analysis?
a)
To explain: The sensitivity analysis.
Introduction:
Sensitivity Analysis:
The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant.
Scenario Analysis:
The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.
Simulation Analysis:
Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.
- Sensitivity analysis is used to know the effect of any possible change on the end result...
b.
To explain: The scenario analysis
Introduction:
Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.
c.
To explain: The simulation analysis and the project on which the simulation will be applied.
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