Sensitivity Analysis

Question 1

What is the general sensitivity analysis rule?

Answer 1

NPV of Project/ Post Tax PV of Item

Question 2

What is the sensitivity analysis formula for selling price?

Answer 2

NPV of project/Post tax PV of revenue

Question 3

What is the sensitivity analysis formula for sales volume?

Answer 3

NPV of project/ Post tax PV of contribution

Question 4

What does sensitivity analysis describe?

Answer 4

How much the cash flow in that area has to change by in order to take the NPV to 0.

Question 5

What is the sensitivity analysis for Cost of Capital?

Answer 5

(CoC - IRR)/CoC

Question 6

What are the strengths of sensitivity analysis?

Answer 6

Presented to management in a form that facilitates subjective judgement
Identifies areas that are critical to the projects success
Easy to understand

Question 7

What are the weaknesses of sensitivity analysis?

Answer 7

Can only analyse 1 factor at a time
It assumes variables can be changed independently
It only identifies how much a variable needs to change by rather than the probability of this change occurring

Question 8

What is a Linear Regression Model?

Answer 8

A statistical technique that quantifies the relationships between a dependent and an independent variable

Question 9

What are the strengths of linear regression model?

Answer 9

Simple & easy to explain

Can be used to predict the impact of expanding variables beyond current estimates

Question 10

What are the weaknesses of linear regression models

Answer 10

There isn’t always a linear relationship between the variables and the outcome
Complex models needed for multiple variables
Spurious relationships could be identified

Question 10

What are the weaknesses of linear regression models

Answer 10

There isn’t always a linear relationship between the variables and the outcome
Complex models needed for multiple variables
Spurious relationships could be identified