Question

  As you consider scenario analyses, how do you ascertain the types of situations you would want to evaluate?

Answer 1

Senario analysis basically analyzing the future outcomes based on some assumptions. It helps in making financial projections based on some prefixed paprameters. We can only analyze the future and this analysis does not guaratee the precise solution for the problem.

It is not based on the historica data; meanig that we can not forecast or project what lyes ahead using the past data. Various senarious are spelt out and would like to predict possible future prediction.

Base case, worst case and best case are the three senarious normally used in case of senario analysis.

It can be done using MS-Excel spreadsheet if it is a Financial senario:

In case of first one, that is Base Case: Taxation rates, Required rate of return (that is discount rate), Growth in the sales, Growth in case of future cashflows are taken into consideration.

In case of Worst Case senario: One case asume worst of the worst tax rates that is instead of nominal 30% one can take into consideration of 35%-40%, taking discount rate much more than WACC, or making the sales or future cash inflows at a very nomial rate with out much exagaration.

In case of Best Case senario: Using a lesser required rate of return, with realistic tax rates, or high growt in of sales etc. to find out the net present value of the business/project.