Explain the meaning of the term ‘sensitivity analysis’ in the context of project appraisal, and discuss...

Explain the meaning of the term ‘sensitivity analysis’ in the context of project appraisal, and discuss how it is carried out for both standard project variables and also the discount rate.

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Expert Solution

Sensitivity analysis is used to reflect how the fluctuation in various independent variable would be affecting the various dependent variables in the financial model.

Sensitivity analysis will be helpful in the the context of the project appraisal as it is used for future projection by reading into the past data so when we are reading into the past performance of the company in regards to various project, it will help in finding out the deviation related to various project and sensitivity analysis will help us to ascertain the rate of the fluctuation, and it will help in making decisions regarding various trends related to past performance and it will help in overcoming the deviation in order to have a better project appraisal

It is carried out for the both standard project variable as well as discount rate because it will be helpful in determination of various independent variable who should be impacting the outcome of various projects and it would also be helpful in determination of a discounting rate which is used to discount the cash flows in regards to various project, in order to find out the acceptability of those projects so these are the independent variable which would be helpful in sensitivity analysis in order to find out how the project should be accepted and improvement should be made regularly.

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