Question

I have difficulty understanding sensitivity analysis. someone please help!

Answer 1

• A sensitivity analysis is used to determine how the different values of the independent variable affect the particular amount of the dependent variable under the given set of the assumptions.
• It can be used to make predictions in the NPV of project or share prices other aspects
• Example:- If a project NPV increase 10% if its selling price per unit is increased by 5%. So the sensitivity of the NPV to sales price is 2 times. It means 1% increase in SP will increase 2% in NPV. In the same way we can check the sensitivity of the other variables like variable cost, rate of return, FCF etc.