How does one analyze the sensitivity of NPVs

Expert Solution

The sensitivity of NPV actually helps in understanding that how the NPV is going to be in different scenario. One way of analyzing the sensitivity of NPV is to change the interest rate being used to discount the projects. If the at higher rates the project is still producing positive NPV then that project is desirable and by calculating the NPV at different discount rates one can understand how the NPV is being affected. The other way is to change the cash flow estimation. When you are estimating the cash, flow associated with a project then you should not be either too optimistic or too pessimistic, hence you can change the cash flows and then see how the NPV is being affected. The other way is to attach probability percentage to the cash flows and evaluate the NPV at different probability of cash flows. If at stricter criteria the project is still producing positive NPV then that project is considered a good project.

jeff jeffy answered 1 year ago

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