Uncertainty

In this lesson

1. 0:00 Section two: uncertainty and information
2. 0:25 Perfect versus imperfect information explained
3. 1:01 Sensitivity analysis: concept and advantages
4. 1:52 Sensitivity analysis limitations
5. 2:27 Copco Cafe worked example setup
6. 3:26 Calculating sensitivity to sales price and volume
7. 6:07 Sensitivity to variable and fixed costs
8. 7:34 Margin of safety calculation
9. 8:16 Simulation analysis versus sensitivity

About this lesson

This lesson covers gathering information to reduce uncertainty, sensitivity analysis to test how changes in key variables affect project viability, and simulation techniques for evaluating multiple risks simultaneously. These techniques are essential for strategic decision-making in CIMA papers E2 and E3, where you'll need to evaluate investment proposals and business scenarios under conditions of imperfect information. Sensitivity analysis is your primary toolkit here. You'll discover how to calculate the percentage change needed in sales price, sales volume, variable costs, and fixed costs before a project becomes unprofitable. The lesson walks through a worked example using a coffee machine investment, showing you how to compare sensitivity across different variables and calculate the margin of safety. Understanding which variables your project is most sensitive to helps you focus control and attention where it matters most during implementation. The lesson also explains the limitations of sensitivity analysis—it doesn't provide a decision rule like NPV does, it treats variables in isolation rather than recognising their interdependencies, and it ignores the probability that some assumptions are more likely to change than others. This is where simulation becomes valuable. Unlike sensitivity analysis, which tests one variable at a time, computer-aided simulation models multiple variables simultaneously using random number tables to reflect real-world uncertainty. While simulation is more powerful, it comes with higher complexity and computational costs, though modern technology is making these approaches increasingly accessible.

Duration: 9m