I’m not able to understand the meaning of this sentence:
decision tree and simulations are approaches that can be used either as complements or as substitute for risk adjusted value, while scenario analysis always be a complement to risk adjusted value as it doesn’t look at full spectrum of possible outcomes.
The sum total of probabilities of all the scenarios used may not equal 100%.
For example, we may take 3 scenarios as-:
As you can see the total probability being analysed in this scenario analysis is only 60%. Therefore we cannot calculate expected values from scenario analysis. In other words, it doesn’t look at the full spectrum of possible outcomes. Thus, it cannot be used as a substitute for traditional DCF.
However, decision trees and simulations cover the entire probability and so can be used to substitute the traditional measures.
Hope this helps!