Sensitivity analysis

Topic 

Sensitivity analysis

Instructions 

  1. Review the types of assumptions used in sensitivity and scenario analysis.
  2. Describe how the options to expand or abandon a project are integrated in the capital budgeting process.
  3. Explain how decision trees are used to value investment alternatives.

Answer Preview 

Sensitivity analysis is a method used to show how different values of independent variable will react on particular dependent variable. These reactions are based on given assumptions. These assumptions include: –

  1. Experimental design which assumes that parameters vary at a given point of time hence having maximum and minimum value levels before and after experiment.

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