Sensitivity Analysis & Scenario Planning - P2

Question 1

What is sensitivity analysis?

Answer 1

Involves posing ‘what if’ questions in NPV questions.
NPV recalculated under different conditions
Helps board understand the impact of key changes for each projects NPV

Question 2

What are the strengths of sensitivity analysis?

Answer 2

Simple
Helps management make more informed decisions
Identifies critical estimates

Question 3

What are the weaknesses of sensitivity analysis?

Answer 3

Assumes that changes to variables can be made independently
Does not look at how likely it is the variable will change
Does not give a definitive decision

Question 4

What is scenario planning?

Answer 4

Focusses on possabilities that might arise and the implications they may have on project