BFD – Sensitivity Analysis - Summary

By Taha Popatia

Sensitivity Analysis

 It measures what % change in a particular variable will result in nil NPV of the project.

General Formula

Sensitivity of a Variable = NPV of Project x 100

PV of all cashflows of the variable

In Case of Taxation

Sensitivity of a Variable = NPV of Project x 100

PV of all cashflows of the variable (net of tax)

 Sensitivity of Project life means by what % the estimated project life may decrease to turn NPV to zero.
Sensitivity of a Project Life = (Project life – Discounted payback period) / Project life

 Sensitivity of a discount rate means at what discount rate the NPV of the project will be zero
Sensitivity of discount rate = (IRR of Project – Discount rate) / Discount rate

 Sensitivity of Volume /Contribution = NPV of Project / PV of all contribution (net of tax)

 Sensitivity of Tax rate = NPV / PV of annual tax expenses

Advantages
 Provides more information to allow management to make subjective judgements
 Identifies critical estimates

Disadvantages
 Assumes variables change independently of each other
 Doesn’t assess the likelihood of a variable changing

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