Scenario Analysis Involves Valuing Businesses Based on Different Sets Assumptions

question 10

Essay

Scenario analysis involves valuing businesses based on different sets assumptions about the future. What are the advantages and disadvantages of applying this methodology in determining an appropriate purchase price using relative valuation methods to estimate firm value?

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Definitions:

NPV Calculation

Net Present Value Calculation; a method used to evaluate the profitability of an investment by comparing its present value of cash inflows and outflows over time.

Similar Investment

An investment in assets or projects that have similar risk levels, expected returns, or financial profiles.

Interest Rate

The cost, in the form of a percentage of the principal amount, charged by a lender to a borrower for accessing funds or assets.

Profit Stream

Future flow of profits from an investment over time.