Sensitivity analysis is best used for (Select all that apply) A. Determining which assumptions are the...

Sensitivity analysis is best used for (Select all that apply) A. Determining which assumptions are the most important for the investment project’s NPV. B. Determining the minimum value for the assumption that makes the project a positive NPV. C. Testing scenarios where multiple assumptions are likely to change. D. Testing scenarios where only one assumption is likely to change.

Expert Solution

The correct answer is "D.Testing Scenarios where only one assumption is likely to change." and "A. Determining the assumptions which are most important for the investment project's NPV." Sensitivity Analysis is concerned with changing an input variable (independent) to see how sensitive the dependent variable is to the input variable.The key to sensitivity analysis is to only change "one" variable at a time. For eg, by varying a company's variable costs, we could determine how sensitive a project's NPV is to change in variable costs, assuming that all other factors are held "constant". And, by changing input variables one by one, you can determine which input is causing the most significant change in Project's NPV which can help you in determining the most imortant assumptions.

Therefore the other two options are incorrect because Sensitivity analysis doesn't help in determining the minimum value for the assumptions that makes the project a positive NPV (B) or for testing scenarios where multiple assumptions are likely to change (C- Scenario Analysis is preferred in those cases).

jeff jeffy answered 2 years ago

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