Question

Businesses sometimes face so many changing variables and costs. Do you think it is wise to do a "best case, worst case, and most likely" scenario to see the full range of financial impact on a project or initiative? Why or why not?

Answer 1

It is wise to do a “best case, worst case and most likely “scenario. Business investment analysis is mostly done based on assumptions of sales volume, Selling price, variable cost and fixed cost. In today’s volatile and uncertain world theses assumptions may not hold true and hence actual conditions may be quite different from the ones assumed during analysis. Hence it makes sense to do a sensitivity analysis for all types of scenario – best, worst and most likely to understand the impact of different variables on the outcome of the project. This helps management in giving reliable insights and understanding how the project outcomes vary under different situations.

It is very important to understand the impact of volatility and uncertainly on the project so that management can make effective decision making before the project is implemented. Since Capital investment decisions are irreversible in nature and involves huge capital outlay management will be keen in knowing the various outcomes when variables affecting the project changes. A sensitivity analysis with different situation helps in risk management.