Question

The best definition of sensitivity analysis is:

Multiple Choice

• The possibility that errors in projected cash flows lead to incorrect decisions.

• The determination of what happens to NPV estimates when we ask what-if questions.

• A combination of scenario and sensitivity analyses.

• A combination of statistical and probabilistic analysis.

• Investigation of what happens to NPV when only one variable is changed.

Answer 1

The best definition of sensitivity analysis is the determination of what happens to NPV estimates when we ask what if questions

> Sensitivity analysis is the analysis of target variables with respect to the final outcome

> for example: in case of NPV calculation the varibales are given NPV will be calculated with given variables range and the final outcome sensitivity will be calculated with respect to variables

> This is also called as what if analysis or simulation model