Compare and contrast the merits of using the following risk assessment approaches: sensitivity analysis, scenario analysis,...

Compare and contrast the merits of using the following risk assessment approaches: sensitivity analysis, scenario analysis, and simulations when analyzing and assessing project risks.

Expert Solution

Sensitivity analysis-

As variations from the base presumptions are expected, businessmen want to know how much their output (for example, revenue) will be impacted by the variations.
Sensitivity analysis aids find the optimal input levels (for example, prices of raw materials, number of staff members, sales price).
Sensitivity analysis is a statistical instrument based upon seeing how inputs & parameters impact outputs. Usually, every input is changed one at a time to observe how it impacts output. But, this doesn’t account for interconnectedness among inputs; they may not be autonomous variables.

Scenario analysis-

Scenario analysis is designed to observe the consequences of an act under various sets of factors. For instance, it reveals how an investment ‘s NPV would vary under high inflation and low inflation.
Scenarios should be sufficiently feasible to give an accurate picture of the results . A ‘good’ scenario for an investor shouldn’t include winning the lottery as, although good, it is neither probable / pragmatic for analyzing probable results.
Several scenario analyses utilize three scenarios- base case, worst & best case. But, the amount & conditions of the scenarios in every analysis can differ.

Simulation is the imitation of the functioning of an actual-world system. The behaviour of a system is explored by producing an artificial history of the system thru the utilization of random numbers. These numbers are utilized in the context of a simulation framework, which is the logical, mathematical and symbolic representation of the relations among the matters of interest of the system. After the framework has been validated, the impacts of fluctuations in the environment on the system, or the impacts of changes in the system itself on the system’s performance can be forecasted utilizing the simulation model

Rahul Sunny answered 10 months ago

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