Question

Sensitivity analysis is conducted by_________________.

A. holding all variables at their base level and changing the required rate of return assigned to a project.
B. changing the value of two variables to determine their interdependency.
C. changing the value of a single variable and computing the resulting change in the current value of a project.
D. assigning either the best or the worst possible value to every variable and comparing the results to those achieved by the base case.
E. managers after a project has been implemented to determine how each variable relates to the level of output realized.

Answer 1

The correct answer is letter "C": changing the value of a single variable and computing the resulting change in the current value of a project.

Step-by-step explanation:

Sensitivity Analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable). It is used to find out what variables affect a publicly-traded company's stock price. Input variables include the company's earnings, number of shares outstanding, debt to equity ratio, and the number of competitors in the industry.