Explain in your own words the concept of the sensitivity analysis in 2 paragraphs.

Expert Solution

Sensitivity analysis is used to calculated how a change in one of the variables to the inputs affects the final decision and the final answer to a financial problem.For example, it is widely used in the calculation of net present value (NPV). In the calculation of the net present value we have many variable inputs like number of units, the variable cost of each unit, the price of each unit, fixed costs of each unit,etc. We use all these inputs to calculate the net present value of a project to decide on the feasibility of the project.

We use the sensitivity analysis to analyse three case scenarios: the best case, the worst case and the base case. The base case analysis is considered normal sales and that would happen at all times. In the best case analysis, we increase the quantity of units sold, reduce costs and increase prices, these variables are changed and then we do the sensitivity analysis for the best case scenario. In the worst case analysis, we decrease the quantity of units sold, increase costs and reduce prices, these variables are changed and then we do the sensitivity analysis for the worst case scenario. This is how sensitivity analysis is used.

jeff jeffy answered 1 year ago

Explain in your own words the concept of the sensitivity analysis.

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