When would scenario analysis be preferred in evaluating project risk?

• A. It changes a single input to test sensitivity.
• B. It guarantees forecast accuracy.
• C. It explores multiple drivers at once to reflect strategic alternatives.
• D. It ignores dependencies between variables.

Answer: (C)

Scenario analysis is used when you want to understand how a project behaves under several plausible future conditions defined by combinations of key drivers. It looks at multiple inputs at once to reflect strategic alternatives and how those factors interact with each other. This helps reveal how cash flows and value could vary under different futures, which is especially important when decisions hinge on how several factors move together—such as price, demand, and costs changing in relation to one another. For example, if price and demand both shift in ways that affect revenue, examining them together shows outcomes you wouldn’t see by changing just one input at a time. By contrast, changing a single input tests sensitivity but misses the interactions between variables. And while scenario analysis doesn’t guarantee forecast accuracy, it provides a structured way to explore a range of possible realities, including dependencies between variables, rather than assuming they move independently.