Sensitivity analysis

In this lesson

1. 0:00 Introduction to sensitivity analysis
2. 1:11 How sensitivity analysis works in project appraisal
3. 3:07 Calculating sensitivity as a percentage change
4. 4:39 Worked example: Fixed costs sensitivity
5. 9:49 Limitations of sensitivity analysis
6. 10:54 Alternative approaches: Payback period and scenario analysis

About this lesson

Sensitivity analysis is a "what if" technique that shows you how much a key variable would need to change before a project stops being financially viable, helping you identify which estimates are most critical to get right. You'll discover the core methodology: calculate the percentage change in a variable by dividing the project's net present value by the present value of the cash flows affected by that variable. The lesson walks you through a worked example involving fixed costs, showing you how to interpret sensitivity results and avoid common mistakes—like confusing independent variables (which stand alone) with dependent variables (which change based on other factors). This technique is essential for objective test questions in Performance Management and Advanced Performance Management papers. The lesson also addresses sensitivity analysis's limitations: it can only test one variable at a time, and while it tells you how much something needs to change, it doesn't tell you how likely that change is. You'll learn practical alternatives and complementary approaches, including using minimum payback periods alongside NPV analysis to focus on more certain early cash flows, and scenario analysis or Monte Carlo simulation to model multiple variables changing together. These tools give you a more robust framework for making investment decisions under real-world uncertainty.

Duration: 13m