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Scenario analysis

A method for the assessment of a risky investment project based on information about possible realizations for some, or all, macroeconomic and project-specific factors that determine the value of the project. A variant of scenario analysis is best-case/worst-case analysis, where each factor is assumed to take the best possible value and the worst possible value; the difference between the values of the project for the two cases is used to gauge its riskiness. More generally, a multiple scenario analysis involves calculations of the value of the project for various combinations of realizations for the factors, sometimes taking into account possible co-movements of different factors. The expected value of the project can he calculated if the probabilities of all possible outcomes are known.

Reference: Oxford Press Dictonary of Economics, 5th edt.