Scenario Analysis Planner (NPV Model)
Define Base Case & Alternative Scenarios
Scenario Analysis Results Comparison
Define base case and scenarios, then click "Run Analysis".
NPV Comparison Chart
Interpreting Scenario Analysis & Export
Understanding Scenario Analysis
Scenario analysis is a process of examining and evaluating possible future events by considering alternative possible outcomes (scenarios). Unlike sensitivity analysis which typically changes one variable at a time, scenario analysis often involves changing multiple variables simultaneously to reflect a cohesive future state.
For financial modeling (like NPV):
- Base Case: Represents the most likely or expected set of assumptions and outcomes.
- Alternative Scenarios: You define other plausible scenarios, such as:
- Pessimistic (Worst Case): Assumes unfavorable conditions for key variables (e.g., lower cash flows, higher discount rate, higher initial investment).
- Optimistic (Best Case): Assumes favorable conditions for key variables.
- Other specific scenarios based on potential market changes, competitor actions, regulatory shifts, etc.
How to Interpret the Results:
- Compare NPVs: Look at the range of NPV outcomes across your defined scenarios. This gives you an idea of the potential upside and downside of the project.
- Identify Key Drivers: By seeing which combinations of input changes lead to significant NPV swings, you can understand which factors are most critical to the project's success.
- Decision Making:
- If NPV remains positive even in pessimistic scenarios, the project might be robust.
- If NPV is highly negative in pessimistic scenarios, it indicates significant risk. You might need mitigation strategies or reconsider the project.
- Understanding the range helps in capital budgeting decisions and risk management planning.