Back to Financial Analysis and Feasibility Studies

Sensitivity Analysis

5 minutes 5 Questions

Sensitivity Analysis is a technique used in financial modeling and risk assessment to evaluate how different values of an independent variable affect a particular dependent variable under a given set of assumptions. This method helps determine the robustness of an investment or project by testing how sensitive its outcomes are to changes in key input variables. In the context of financial analysis and feasibility studies, Sensitivity Analysis involves altering one or more input variables—such as sales volume, cost estimates, discount rates, or projected growth rates—to assess the impact on metrics like Net Present Value (NPV), Internal Rate of Return (IRR), or profitability. By doing so, analysts can identify which variables have the most significant effect on project outcomes and understand the potential risks associated with uncertainties in these variables. The steps in conducting a Sensitivity Analysis include: 1. Identifying the key input variables that may be uncertain or subject to change. 2. Defining a range of plausible values for each variable. 3. Systematically varying one variable at a time while keeping others constant to observe the effect on the outcome. 4. Analyzing the results to determine which variables the project is most sensitive to. Sensitivity Analysis provides valuable insights into the risk profile of a project. It helps decision-makers understand the potential variability in outcomes and prepare contingency plans or risk mitigation strategies. For example, if a project's profitability is highly sensitive to market demand, the organization might focus on market research or flexible production planning. However, Sensitivity Analysis has limitations. It typically changes one variable at a time, which may not capture the combined effect of multiple variables changing simultaneously. To address this, scenario analysis or Monte Carlo simulation can be used for more comprehensive risk assessment. Overall, Sensitivity Analysis is an essential tool in financial analysis and feasibility studies, enabling organizations to make more informed and resilient decisions by understanding the potential variability in project outcomes.

Test mode:
Start practice test
PMI-PBA - Financial Analysis and Feasibility Studies Example Questions

Test your knowledge of Amazon Simple Storage Service (S3)

Question 1

A project manager wishes to ascertain the project's sensitivity to changes in technology availability. Which tool would best suit their needs?

Correct Answer: Sensitivity Analysis

Sensitivity Analysis is the correct tool for this scenario. This method is used to understand how different changes in input variables impact a given output. In this context, it can be used to ascertain the project's sensitivity to changes in technology availability. Monte Carlo Simulation, while a robust decision making tool, it's often used to assess risk and uncertainty, which is not the specific need in this question. Decision Tree Analysis is a graphic tool for decision making where different paths and outcomes can be visualized, not focused on assessing sensitivity to specific variables changes. Time-Series Forecasting is a technique that uses historical data as inputs to make informed estimates that are predictive in nature. It is not used to ascertain sensitivity to changes in specific variables.

Question 2

During a city beautification project, the project manager wants to gauge the influence of a minor fluctuation in seasonal worker availability on the overall project timeline. What type of analysis would best suit this situation?

Correct Answer: Sensitivity Analysis

The best analysis method for this particular situation is 'Sensitivity Analysis'. This type of analysis is designed to show how different changes in the input values of a mathematical model will impact the results of that model. In this case, a small fluctuation in the availability of seasonal workers would be one such input. By using sensitivity analysis, the project manager would be able to see how this minor change could ultimately affect the timeline of the beautification project. The 'Resource Leveling Analysis' is wrong because it is primarily used to resolve resource overallocation by delaying tasks. The 'Schedule Risk Analysis' is incorrect as it is typically used to identify and manage potential risks that could delay a project. Lastly, the 'Resource Smoothing Analysis' is also incorrect because it is used to adjust the project model to reduce the need for resources during periods of peak demand, which does not apply to this situation.

Question 3

The project manager of a windmill construction project wants to understand how changes in the speed of wind at the site might impact power production. What type of assessment would best suit this scenario?

Correct Answer: Sensitivity Analysis

The best fit for this scenario is a 'Sensitivity Analysis', which is used to understand how the variation in the output of a model (simulation) can be apportioned to different sources of variation in the model's inputs. In the context of a windmill construction project, 'Sensitivity Analysis' would help the project manager to understand how changes in the wind speed could impact power production. On the other hand, 'Risk Assessment' might be relevant for understanding and managing risks associated with the construction and operation of the windmill but does not specifically address the relationship between wind speed and power production. 'Cost-Benefit Analysis' would be useful in deciding whether the project is financially feasible, but it wouldn't directly address the impact of changing wind speed. 'Quantitative Analysis' is a broad term that includes a variety of methods and does not specifically imply the kind of input-output relationship analysis provided by Sensitivity Analysis.

Go Premium

PMI Professional in Business Analysis Preparation Package (2024)

  • 3015 Superior-grade PMI Professional in Business Analysis practice questions.
  • Accelerated Mastery: Deep dive into critical topics to fast-track your mastery.
  • Unlock Effortless PMI-PBA preparation: 5 full exams.
  • 100% Satisfaction Guaranteed: Full refund with no questions if unsatisfied.
  • Bonus: If you upgrade now you get upgraded access to all courses
  • Risk-Free Decision: Start with a 7-day free trial - get premium features at no cost!
More Sensitivity Analysis questions
95 questions (total)
Start 95 question test