IRR

The IRR itself doesn't take sensitivity into account.

However the problem in practice is that whatever figure we estimate for the cost of capital, it is only an estimate - it is impossible to calculate precisely.

So, even though we might think that the cost of capital is (say) 10% and maybe the project has a positive NPV at this cost, the problem is what happens if the cost of capital turns out to be higher?

The IRR tells us how much error we can afford. If the cost of capital is (say) 10% and the IRR is (say) 12%, then we can afford an error of 2 percentage points in our estimate before the project becomes not worthwhile.

Because we can afford an error of 2% on an estimate of 10%, the sensitivity of the cost of capital is 2/10 = 20%.

The lower the sensitivity is, the more worried we would be about going ahead with the project.

Thanks a lot Mr. John

THis will definitely Help