Natick Nurseries has used scenario analysis to evaluate the purchase of a former dairy to use for nursery stock. The best case scenario produced a very favorable NPV of $4,000,000; the NPV of the most likely case was $2,000,000, but the worst case scenario resulted in an NPV of $(3,000,000) which would bring the company close to bankruptcy. Natick could improve its decision by
A) using sensitivity analysis.
B) using simulation analysis.
C) simply accepting the best case scenario and rejecting the other outcomes.
D) weighting the favorable scenarios more heavily to increase the expected NPV.

Question

Quizplus · Accepted Answer

Using simulation analysis would allow Natick Nurseries to generate thousands of scenarios and their respective probabilities, providing a more comprehensive view of the potential outcomes. This would allow the company to make a more informed decision and potentially identify ways to mitigate the risks associated with the worst case scenario. Sensitivity analysis could also be helpful, but it would only analyze how changes to individual variables would impact the NPV, rather than providing a full range of possible outcomes like simulation analysis. Simply accepting the best case scenario and rejecting the other outcomes would be overly optimistic and risky, and weighting the scenarios would not change the actual probabilities of each outcome.

Natick Nurseries Has Used Scenario Analysis to Evaluate the Purchase