Practice Problem – Sensitivity Analysis

Practice Question

Cases in Finance
Risk Analysis Measures
Sensitivity Analysis
True or False

The risk analysis measure known as sensitivity analysis examines how different values of an independent variable affect a particular dependent variable under a given set of assumptions.

Answer +
TRUE
Explanation +

Sensitivity analysis is a technique used to understand how the uncertainty in the output of a model can be attributed to different sources of uncertainty in its inputs. In finance, it's particularly useful for testing how changes in variables like revenue, costs, or discount rates influence project outcomes such as NPV or IRR. This helps decision-makers identify which assumptions are most critical to the success of a project.