Sensitivity analysis of project, Financial Accounting

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Q. Sensitivity Analysis of Project?

This system measures the change in project NPV arising from a fixed change in each project variable or measures the change in every project variable required to make the NPV zero. Merely one project variable is changed at one time. The key or else critical project variables are the ones to which the NPV is most sensitive or the ones where the smallest change results in a zero NPV.

Knowledge of the major project variables allows managers to confirm the strength of their underlying assumptions thereby increasing their confidence that the forecast NPV will be achieved. It as well allows managers to monitor these variables closely when the project is implemented as a way of ensuring success. But sensitivity analysis doesn't indicate the likelihood of a change occurring in a given project variable and so strictly speaking, does not assess project risk at all.


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