Sensitivity analysis is conducted by:
A)holding all variables at their base level and changing the required rate of return.
B)changing the value of two variables to determine their interdependency.
C)changing the value of a single variable and computing the resulting change in the project's NPV.
D)assigning either the best or the worst possible value to every variable and comparing the results to the base case.
E)reviewing a project after implementation to determine how the actual results are comparing to the predicted results.

Question

Quizplus · Accepted Answer

Sensitivity analysis involves changing the value of a single variable while holding all other variables constant in order to determine how that variable impacts the project's NPV. This allows managers to identify the most critical variables and focus on managing the risks associated with them. Option A is incorrect because the required rate of return is not a variable in the project itself. Option B involves changing two variables, which would be part of a scenario analysis rather than sensitivity analysis. Option D involves assigning extreme values to all variables, which would be part of a simulation analysis rather than sensitivity analysis. Option E relates to post-implementation review rather than sensitivity analysis.

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