Sensitivity analysis

In this lesson

1. 0:00 Sensitivity analysis overview
2. 1:03 Calculating sensitivity by variable
3. 2:18 Worked example: initial investment
4. 3:48 Sensitivity to selling price changes
5. 4:29 Sensitivity to sales volume changes
6. 5:50 Advantages and limitations of sensitivity analysis

About this lesson

You'll work through the core formula (NPV divided by present value of the variable), apply it to key drivers like initial investment, selling price, and sales volumes, and understand when to use sensitivity analysis alongside other appraisal methods. Sensitivity analysis is particularly valuable when you're unable to quantify uncertainty directly. By identifying which assumptions have the greatest impact on your net present value calculation, you can focus your attention and resources on monitoring the most critical elements of your project. The technique reveals that even small changes in sensitive variables can shift a project from viable to unviable, making it an important risk management tool in your investment decision-making toolkit. This video covers the practical application of sensitivity analysis with worked examples. You'll see how to calculate sensitivity for different project variables and interpret what the results mean for your investment decision. It's important to recognise that while sensitivity analysis highlights risk areas and indicates project success potential, it has limitations—it doesn't provide a standalone decision rule, assumes variables change in isolation, and doesn't account for the probability of changes occurring. Understanding both its strengths and limitations will help you use it effectively alongside other appraisal techniques.

Duration: 7m