Scenario Analysis

Scenario Analysis Just focusing on the expected value of a risky choice is not a satisfactory way to make a decision. The expected value may not be a possible outcome, and the best possible and worst possible outcomes matter. One solution is to model several scenarios. Typically these models include a worst-case scenario, a most likely scenario, and a best-case scenario. The process of setting up a decision tree helps identify these scenarios.

The worst case, which is relatively unlikely, yields a profit of $0. The best case, which is the most likely scenario, yields a profit of $120,000. Thus, buying the nursing home has the potential to be profitable and appears to be low risk. The scenario analysis also reinforces the conclu- sion that succeeding in making improvements is vital.

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