Final answer:
Scenario analysis helps determine the financial viability of a project by comparing initial investment costs to normalized future cash inflows, employing mathematical models and present discounted value as core analytical tools.
Step-by-step explanation:
Scenario Analysis in Business
The question involves evaluating a business project using scenario analysis. This analysis is crucial in assessing the financial viability and risk profile of a project that involves an investment, in this case, $1,920,000, with a life span of 6 years and no salvage value. Depreciation is accounted for using a straight-line method. When businesses contemplate physical capital investments, they often employ mathematical models to estimate costs and compare them to the present discounted value of expected future cash flows. This comparison helps determine whether the investment is worth pursuing.
Present discounted value is not only important in finance but also in other fields such as environmental policy, infrastructure, and even personal finance, like assessing lottery winnings. When comparing various project scenarios, it is essential to normalize costs to make an accurate comparison of cost per unit, such as cost per thousand gallons of water, if the project pertains to water treatment for example.
In summary, mathematical models aid in estimating initial costs and predicting alternative solution costs, while the present discounted value is a key analytical tool used to measure future benefits against initial investment costs across different time periods.