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Abstract

This paper presents a scenario analysis from an actual firm, one with a substantial level of sophistication. In this firm, input data is regularly created using probability distributions for sales estimates, cost estimates, tax considerations, and depreciation schedules. One limited scenario is presented in this paper - simplistic enough that students are able to concentrate on the mechanics of the simulation, but complex enough to reflect the degree of quantitative capability necessary in a financial analysis group within a company. The lack of a real-world example is thus solved in this paper, and sufficient guidance is given to direct a student through the solution of the simulation using Excel. In addition, this paper provides guidance for professors who would like to adopt the method, or the case, or both, in their coverage of risk adjustments in capital budgeting.

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