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Sensitivity Analysis in Capital Budgeting

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What is a sensitivity analysis? How is it determined? How can risk be addressed in the capital budgeting process?

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The Solution decribes a sensitivity analysis and explains how it is determined. It also discusses how it is used to mitigate risk in the capital budgeting process.

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Sensitivity analysis is technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price.

Sensitivity analysis is very useful when attempting to determine the impact the actual outcome of a particular variable will have if it differs from what was previously assumed. By creating a given set of scenarios, the analyst can determine how changes in one variable(s) will impact the target ...

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