Scenario Analysis and Sensitivity Tables

Financial modeling is not limited to building a single “base case” forecast. The future is uncertain, and key assumptions can differ significantly from realized figures. Scenario analysis and sensitivity analysis make it possible to understand how uncertainty in key assumptions affects output indicators — such as the company’s value, IRR, or project NPV.

Sensitivity Analysis. One-dimensional analysis: how the target metric (for example, EV or share price) changes when one assumption is altered, with all others remaining constant. Example: a table showing the dependence of Equity Value on WACC (rows) and Terminal Growth Rate (columns). Two-dimensional analysis (Data Table in Excel): simultaneous variation of two variables. The classic 5×5 matrix displays the range of possible values. Technically implemented through the Excel Data Table (What-If Analysis). Tornado Chart: visualizes which factors are most sensitive — each factor is shown as a horizontal bar reflecting the range of influence.

Scenario Analysis. Unlike sensitivity analysis (varying one factor while holding others constant), scenario analysis simultaneously changes several interrelated assumptions. Base Case: the most probable scenario. Bull/Upside Case: optimistic assumptions (high revenue growth, margin improvement, low capex). Bear/Downside Case: pessimistic assumptions (recession, loss of clients, increased competition). Stress Test: extreme scenario (crisis, regulatory shock).

Monte Carlo Simulation — an advanced method: instead of discrete scenarios, a probability distribution is specified for each key assumption (revenue growth — normal distribution with a mean of 5% and a standard deviation of 3%). The model is run 10,000 times with random combinations. Result: the probability distribution for EV or IRR. Allows calculation of the probability of achieving the target IRR, percentile outcomes. Implemented using Excel add-ins (@RISK) or specialized tools.

Practical guidelines for building scenarios. Scenarios must be internally consistent: you cannot simultaneously assume high revenue growth and low capex — growth often requires investment. Each scenario should have a narrative (story): “bears” — a recession in 2025, loss of a key client. Which variable is the model most sensitive to? This shows where to focus efforts in DD. Presentation of the valuation range using a “football field chart.”