Question

You are asked to perform an analysis of the impact of expansion on the company’s Net...

You are asked to perform an analysis of the impact of expansion on the company’s Net Present Value.

 Fully define Sensitivity Analysis and provide examples.

 Fully define Scenario Analysis and provide examples.

 What are the basic differences between the Sensitivity Analysis technique and the Scenario Analysis technique?

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Answer #1

Sensitivity analysis is changing the parameters like cost of capital, or assumed long term growth rate and seeing its effects on NPV. Example, Apple company changing the terminal EBIT margin to different levels to look at the value of its stock.

Scenario analysis is changing the macro-economic, operationg assumptions about sales, operating expenses et al. and looking at the effect on cash flow generation. Example, Apple co forecasting recession, business as usual, or boom phase in US economy and looking at its effects on its cash flows.

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