> For the complete documentation index, see [llms.txt](https://vikram-bajaj.gitbook.io/introduction-to-corporate-finance-coursera/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://vikram-bajaj.gitbook.io/introduction-to-corporate-finance-coursera/discounted-cash-flow-dcf/sensitivity-analysis.md).

# Sensitivity Analysis

Sensitivity analysis is an integral part of any valuation. It allows us to answer the following:

* Where value is created and destroyed?
* What are the key value drivers?
* What is the risk exposure?
* How robust is the profitability of the project?

**Break Even Analysis** finds the parameter value that sets the NPV of the project equal to zero, holding fixed all other parameters. It assumes that parameters are independent of each other.

**Comparative Statics** quantifies the sensitivity of the valuation to variation in a parameter, holding fixed all other parameters. It also assumes that parameters are independent of each other.\
The **elasticity** of the valuation w\.r.t. a parameter can be computed using:\
$$Elasticity = \frac{% Change, in, NPV}{% Change, in, Parameter}$$

**Scenario Analysis** quantifies the sensitivity of the valuation to variation in multiple parameters. Therefore, it doesn't assume that the parameters are independent of each other.

**Simulation Analysis** performs the valuation for a large number of simulated parameter values (i.e., scenarios).