Sensitivity analysis
Sensitivity analysis identifies assumptions on which a decision depends strongly. A common FM approach changes one variable while holding the others fixed and finds its break-even movement. For an input that affects NPV proportionately, sensitivity percentage can be NPV divided by the present value of the relevant net cash-flow effect. Use contribution rather than sales alone when a volume change also changes variable costs, and include tax effects where relevant. Sensitivity is not a probability: a small permitted movement shows vulnerability, but does not establish how likely that movement is.
Worked example
A project has NPV $12,000. The present value of an independent net revenue component is $150,000, with no offsetting variable cost or tax effects in this example. A fall of $12,000/$150,000 = 8% in that component would reduce NPV to zero.
Common mistake
Reporting an 8% sensitivity as an 8% probability of project failure, or ignoring costs that change with sales volume.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |