Sensitivity testing

An alternative method of sensitivity analysis is to calculate by how much cash flows

need to be worse than expected before a decision would change (where the NPV
becomes negative). This is described as method 2 above
This requires the calculation of the present value of each input cash flow. The NPV
can then be compared to this to see by how much it would have to change before
the NPV were to fall to zero.

Sensitivity
Sales price NPV / PV of revenue
Indicates the maximum change in revenue per unit which
will result in the NPV changing to zero.
Variable cost NPV / PV of variable costs
Indicates the maximum change in variable cost per unit
which will result in the NPV changing to zero.

Fixed Cost NPV / PV of Fixed costs

Indicates the maximum change in total fixed cost which will
result in the NPV changing to zero.

Volume NPV / PV of total contribution

Indicates the maximum change in contribution margin which
will result in the NPV changing to zero

Life of the project (Estimated life – Discounted payback period) / Estimated

life.
Indicates the maximum percentage decline in life of the
project which will result in the NPV changing to zero
Initial cost NPV / initial outlay
Indicates the maximum increase in initial cost which will
result in the NPV changing to zero

Tax rate NPV / PV annual tax expenses

Indicates the maximum increase in tax rate which will result
in the NPV changing to zero

Taxation involved Where the tax is involved all the present values above
indicated needs to be after tax
For example, the sensitivity of the solution to changes in
variable costs NPV / PV of after tax variable cost