Question

What is the essential difference between sensitivity analysis and scenario analysis?

Please provide with an example.  

Answer 1

Scenario Analysis is the method of predicting the future value of a project or an investment based on the changes in existing variables. It facilitates exploring the impact of different market conditions on the project or investment as a whole. This analysis estimates the changes in cash flow or business value.

Example : Achieving growth by changes in the variables like production, price, capital expenditures etc

Sensitivity Analysis is used to analyze the impact of different values of independent variables on dependent variables under specific conditions. It is a useful tool beyond financial forecasting and applicable in biology, economics, engineering etc.

Example : Finding through analysis that the use of certain raw material increases the costs

Sensitivity analysis examines the effect of changes in only one variable at a time. But Scenario analysis assesses the effect of changes in all the variables at the same time.