Sensitivity Analysis and Scenario Analysis

Both sensitivity analysis and scenario analysis are important tools for modeling financials and decision-making that help to grasp uncertainty and evaluate risk. Sensitivity analysis changes one variable and looks at how it affects the outcome of a model, while taking multiple variables into an analysis simultaneously moves forward under scenario analysis to understand the various potential outcomes that will arise in the future. Sensitivity analysis is more focused on specific variables and simpler, whereas scenario analysis provides a more holistic view of how different combinations of factors might affect results. Both tools are often used in conjunction with methods like Discounted Cash Flow (DCF) analysis to assess the robustness of financial projections and the impact of varying assumptions.