Scenario analysis can help a firm to:
A) understand the degree of uncertainty that a different set of project-affecting circumstances may hold.
B) eliminate all of the uncertainty that a different set of project-affecting circumstances may hold.
C) transform a risky project into a risk-free project.
D) understand the degree of certainty that a similar set of project-affecting circumstances may hold.

Question

Quizplus · Accepted Answer

Scenario analysis helps a firm to understand the degree of uncertainty that different project-affecting circumstances may hold. It involves creating a range of hypothetical situations and examining the impact of each scenario on the project. This allows the firm to identify potential risks and opportunities and to develop strategies to mitigate or take advantage of them. Scenario analysis does not eliminate uncertainty or make a risky project into a risk-free project, but it does help managers make informed decisions in the face of uncertainty. Choice B and C are incorrect because eliminating uncertainty and transforming a risky project into a risk-free project are generally not possible. Choice D is incorrect because scenario analysis is not focused on understanding certainty but rather uncertainty.

Scenario Analysis Can Help a Firm To