Sensitivity Analysis Tool (NPV Model)
Base Case NPV Model Inputs
Sensitivity Analysis Results
Setup base case and sensitivity parameters, then click "Run Analysis".
Base Case Result:
Base Case NPV:
N/A
Sensitivity Table: Impact on NPV
Sensitivity Chart (1-Way Analysis on Variable 1)
Interpreting Sensitivity Analysis & Export
Understanding Sensitivity Analysis
Sensitivity analysis is a financial modeling technique used to determine how different values of an independent variable (or set of variables) will impact a particular dependent variable under a given set of assumptions. It helps in understanding the uncertainty and risk associated with a project or investment.
In the context of Net Present Value (NPV):
- It shows how changes in key inputs (like cash flows, discount rate, initial investment, project life) affect the project's NPV.
- Variables that cause the largest change in NPV are considered "most sensitive" and require closer attention and more accurate estimation.
- One-Way Sensitivity Analysis: Changes one input variable at a time while holding others constant.
- Two-Way Sensitivity Analysis: Changes two input variables simultaneously to see their combined effect, often displayed in a data table.
How to Interpret the Results:
- Base Case NPV: This is the NPV calculated with your most likely estimates for all inputs.
- Sensitivity Table/Chart:
- Observe the range of NPV outcomes as your selected variables change.
- Identify which variable's changes lead to the widest range of NPVs or cause NPV to turn negative most quickly. These are your critical variables.
- For a two-way table, look at the combinations of variables that result in positive or negative NPVs.
- Decision Making: Use the insights to assess project viability, identify key risks, and potentially focus efforts on managing the most sensitive variables. For instance, if NPV is highly sensitive to small changes in annual cash flow, you might invest more in market research to refine cash flow projections.