In project analysis, what is the purpose of scenario analysis?

The purpose of scenario analysis in project analysis is to explore various potential outcomes associated with a project or investment. This technique involves creating different scenarios, including lower, base, and upper cases, to understand how changes in key inputs and assumptions can affect the overall financial performance and viability of the project. By assessing these various scenarios, decision-makers can gauge the potential risks and rewards, which aids in making more informed choices.

Using scenario analysis allows financiers and project managers to see a range of possible futures rather than relying on a single forecast. This holistic view helps in identifying financial impacts across diverse conditions, such as best-case and worst-case scenarios, which contrasts with focusing solely on a singular outcome. By preparing for different situations, organizations can develop strategies that are more resilient to uncertainty and volatility in the environment.

The other options provided either limit the scope of analysis (like evaluating the effectiveness of a single financial forecast or focusing only on negative outcomes) or are too narrow (calculating only break-even points), which do not capture the broader objective of scenario analysis. Therefore, the correct answer reflects the comprehensive nature of real-world project assessment that scenario analysis aims to achieve.