Question

Probability is often used in scenario analysis and risk analysis. For example, the chief financial officer of a company may look at the worst-case scenario, likely scenario, and best-case scenario when it comes to revenue predictions for a new product. How would knowing the probability of each scenario help in planning the company’s budget?

Answer 1

Knowledge of the probability of the worst-case scenario, likely scenario, and best-case scenario when it comes to revenue predictions for a new product.will definitely help in planning the company’s budget as follows:

Suppose a new product is planned to be introduced by the company. Statistically the company can estimate the probability of the worst-case scenario: i.e. the possibilities of all those combinations of various competing constraints in the development and marketing the new product which are likely to bring loss to the company. If the computed probability value is negligible, the company can rest assured that the new product is definitely profitable and go ahead with production. If the computed probability value is not negligible, the company should identify factors which cause the loss and all efforts should be done to rectify these factors before actual production.

The probability of likely scenario gives the likelihood of the product being successful in normal conditions.

The best - case scenario gives the likelihood of the product being successful in conditions which are all together in favor of the success of the new product.