Sensitivity analysis
Sensitivity analysis changes one input at a time — such as the discount rate or revenue growth — and measures the resulting change in NPV, identifying which assumptions most critically affect whether a project or investment creates value.
FrameworkDCF investment appraisal
See it move
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A project's base-case NPV of €500,000 responds differently to different assumptions. Raising the discount rate by one percentage point cuts NPV by €80,000, to €420,000. A 5 percent fall in revenue is far more damaging, cutting NPV by €200,000, to €300,000. Because revenue moves the answer more, it is the assumption that deserves the closest scrutiny before the project is approved.
Where it fits
TopicCapital Budgeting & Investment AppraisalCoreSubjectCorporate FinanceCoreTopicBusiness Valuation & DCFCore