Sensitivity Analysis
Definition
Testing how changes in key assumptions affect a model's output, often NPV or IRR.
How It Works
Change one input at a time (e.g., discount rate, growth rate, revenue) and observe how the output changes. Tornado charts visualize which inputs matter most.
Example
If NPV is $100K at 10% WACC but turns negative at 14%, WACC is a key sensitivity.
Common Misconceptions
- ✗It replaces scenario analysis (they are complementary)
- ✗One analysis covers all risk (it only shows one-at-a-time effects)
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Common questions about Sensitivity Analysis
Sensitivity changes one variable; scenario analysis changes multiple variables simultaneously to model different states of the world.
A horizontal bar chart that shows which input variables have the largest impact on the output. The widest bars at the top represent the most sensitive inputs, creating a tornado shape that quickly identifies which assumptions matter most.