Sensitivity analysis shows how the distribution of possible net present values is affected by a change in one input variable.

Question

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Sensitivity analysis is used to evaluate the impact of changes in input variables on a project's net present value (NPV) and assess the risk associated with different scenarios. It helps in identifying the key variables that drive the uncertainty in the NPV estimate and how they affect the project's financial performance. By changing one input variable at a time, sensitivity analysis can show how the distribution of possible NPVs changes and help to prioritize the variables that require further analysis and monitoring.

Sensitivity Analysis Shows How the Distribution of Possible Net Present