Scenario Analysis

Although sensitivity analysis is useful, it does have limitations. It is often difficult to specify precisely the relationship between a particular variable and the NPW. The relationship is further complicated by interdependencies among the variables. Holding operating costs constant while varying unit sales may ease the analysis, but in reality, operating costs do not behave in that manner. Yet it may complicate the analysis too much to permit movement in more than one variable at a time. A scenario analysis is a technique that does consider the sensitivity of NPW both to changes in key variables and to the range of likely variable values. For example, the decision-maker may consider two extreme cases, a "worst-case" scenario (low unit sales, low unit price, high variable cost per unit, high fixed cost, and so on) and a "best-case" scenario. The NPWs under the worst and best conditions are then calculated and compared to the expected, or base-case, NPW. Example 17.5.2 will illustrate a plausible scenario analysis for the BMC's transmission-housings project.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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