Investment Appraisal - Sensitivity Analysis

Sensitivity analysis is a technique which allows the analysis of changes inassumptionsused inforecasts.As such, it is a very useful technique for use in investment appraisal.

Assumptions Used in Business Forecasting

There are many examples of where assumptions need to be made by management as they prepare important business forecasts: for example:

Cash-flow forecast

• Timing of cash inflows and outflows
• Amount of cash inflows and outflows
• Receivables & payables days

Budgeted Profit

• Sales volumes and unit selling prices
• Gross profit margins & overheads

Investment Appraisal

• Timing and amount of project cash flows
• Period over which project will run
• Amount of initial investment

Breakeven Analysis

• Average selling prices and variable costs
• 通过分类和总固定成本

The key questions to ask whenever you are looking at business assumptions like those listed above are:

• How reliable are the assumptions made?
• What happens if assumptions turn out to be significantly different in reality?
• Which assumptions are most significant to the forecast?

Sensitivity analysishelps answer these questions!