Question

What is scenario analysis and why is it important?

b.

What are some additional managerial options that should be considered?

Answer 1

Scenario analysis is a process of examining and evaluating possible evvents that could take place in future by considering various feasible results or outcomes .This process is used to estimate changes in the value of a cash flow especially when there are potentially favourable and unfavorable events that could impact the company . Scenario analysis is important because it enables insurers to develop mitigation strategies and contingency plans for such events . The use of scenario analysis can help insurers to avoid making poor decisions and to identify opportunities that could increase the return on equity and reduce income volatility .Scenario analysis is a way of structuring thinking about future of identifying potential problems .Scenario analysis facilitates business decisions by taking into account a number of potential developments and possible future events in business environment .

There are many reasons why managers and investors perform this analysis .Benefits of scenario is analysis are future planning avoiding risk and projecting investment returns or losses. Future planning helps the investors to plan for future investment .To avoid poor investment decisions scenario analysis enables the independent investors to assess investment in prospectts. Scenario analysis can apply to investment strategy as well as corporate finance. Scenario planning is making assumptions on what the future is going and how the business environment will change overtime of that future .The scenario is a powerful analytic tool for policy making ,a disciplined approach to the speculation and intuition that influence long term policy decisions .