Sensitivity analysis

The statement in the Kaplan text is correct.
It mentions that estimates for each variable can be reconsidered to assess the likelihood of the estimate being wrong.

It provides an example of assessing the chance of the selling price falling by more than 5%. However, it also states that the maximum possible change is often expressed as a percentage and that this formula only works for total cash flows.

The smaller the percentage, the more sensitive the decision is to a change in the variable.

So if we were asked for the sensitivity of a cash flow of say $5000, it isn’t too high, is it enough because if something suddenly was different from what you expected?

You are asked to analyse the sensitivity of all variables. So if we are given sales of $17000, variable costs of $7000, and fixed costs of $5000.

The sensitivity of sales will be 5000/17000 * 100 = 29.4%

The sensitivity of variable costs will be 5000/7000 * 100 = 71.4%

This is the same as saying sales can fall by no more than 29.4%

This means that if the sales value or selling price decreases by 29.4% ( say the selling price was $25 * 0.706 = $17.65) so this will reduce the sale amount to $12,000, and there will be no profit. Any decrease in the price of more than 29.4% will make this project loss making for example.

It means you start with a total cash flow
The 5000 in my example

The bottom is what your uncertain about
It could be sales price, variable etc