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Dear Sir,
In question Your Business (6/09) part a, it asks to assess the sensitivity of the project to a $1 mil change in the initial capital expenditure.
In theory, the sensitivity approach is “To estimate by how much costs or revenues would need to differ from their estimated values before the decision would change”
In the solution, they calculated when the capex increase $1mil, it will cost only $0.738 mil. How can we call this is the sensitivity analysis (compare with theory i extracted above). I am confused when i read the question and answer. Please help to explain.
Thanks,
DTThey are using the word sensitivity in a slightly different way in this question.
If they simply asked for the sensitivity of a particular flow, then yes – you would calculate what change to end up changing the decision.
However this particular question specifically asked for the sensitivity (i.e. the effect) of a $1M change in the flow.
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