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Sensitivity Analysis

Sensitivity analysis is a method used to evaluate how changes in key variables like cost, revenue, and net profits affect investment projections. It helps protect investments against uncertainties by assessing project robustness and identifying vulnerable aspects, although it has limitations such as only showing NPV impact and being somewhat subjective. The implementation process involves identifying impact factors, developing mathematical connections, and analyzing variable changes.

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9 views7 pages

Sensitivity Analysis

Sensitivity analysis is a method used to evaluate how changes in key variables like cost, revenue, and net profits affect investment projections. It helps protect investments against uncertainties by assessing project robustness and identifying vulnerable aspects, although it has limitations such as only showing NPV impact and being somewhat subjective. The implementation process involves identifying impact factors, developing mathematical connections, and analyzing variable changes.

Uploaded by

gaurab
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

CAIIB

Advanced Business & Financial Management

Module B :
Sensitivity Analysis
Sensitivity Analysis: Managing
Investment Uncertainty

Uncertainty in variables like cost and revenue


can jeopardize investments. Sensitivity
analysis helps assess how changes impact our
projections.
• The variables and important components of capital budget

• cost, • Sensitivity analysis aims • Taking all possible


• revenue and to assess the impact of variables into account
changes in each of these will be a difficult task,
• net profits. important variables on
our projections or making calculations
estimates. complex.
Understanding the Basics
Purpose Protection
Evaluates how Safeguards
changes in key investments against
variables affect uncertain future
project outcomes. movements.
Focus
Examines cost, revenue and profit variables.
Implementation Process
Identify Impact Factors
Determine which variables affect NPV or IRR of the project.
Develop Mathematical Connections
Create formulas showing relationships between variables.
Analyze Variable Changes
Calculate how each variable's fluctuation affects
project outcomes.
Benefits and Limitations
Advantages Limitations
• Assesses project robustness • Only shows NPV impact
• Identifies vulnerable aspects • Changes one variable at a time
• Enables plan amendments • Somewhat subjective
• Enhances risk management • Depends on analyst perception

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