Which of the following correctly describes sensitivity analysis?
A) recalculation of project NPV by changing several inputs to new but consistent values.
B) measures the degree to which fixed costs magnify the effect on profits of a shortfall in sales.
C) analysis of how project NPV changes if different assumptions are made about key variables.
D) measures the future level of sales at which NPV equals zero.

Question

Quizplus · Accepted Answer

Sensitivity analysis involves analyzing how changes in key variables or assumptions affect the project's net present value (NPV). It provides a range of possible outcomes by varying one assumption at a time while holding all other variables constant. This helps managers identify which assumptions are most critical to the success of the project and plan accordingly. Option A describes scenario analysis, Option B describes break-even analysis, and Option D describes the calculation of the project's break-even point.

Which of the Following Correctly Describes Sensitivity Analysis