The difference between scenario analysis and sensitivity analysis is:
A)Scenario analysis is based upon the internal rate of return (IRR)and sensitivity analysis is based upon net present value (NPV).
B)Only sensitivity analysis allows us to change our estimated inputs of our net present value (NPV)analysis.
C)Scenario analysis considers the effect on net present value (NPV)of changing multiple project parameters.
D)Only scenario analysis breaks the net present value (NPV)calculation into its component assumptions.

Question

Quizplus · Accepted Answer

Scenario analysis considers the effect on net present value (NPV)of changing multiple project parameters, whereas sensitivity analysis allows us to analyze the impact of changing a single variable or input on the output. Option A is not correct as it confuses the methods used in capital budgeting analysis. Option B is incorrect as sensitivity analysis not only allows us to change estimated inputs but also examines the output when individual input factors are changed. Option D is also incorrect as both methods conduct NPV analysis by changing input factors.

The Difference Between Scenario Analysis and Sensitivity Analysis Is