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).