What Is Sensitivity Analysis?

Sensitivity analysis measures how much a single input can change before a decision reverses. In investment appraisal, it usually asks: by how much can a variable — sales, costs, the discount rate — move before a positive NPV becomes zero? It's a simple but powerful way to understand which assumptions a decision really depends on.

How is sensitivity calculated?

For a given variable, the sensitivity margin is often expressed as: NPV ÷ present value of the cash flow relating to that variable, as a percentage.

The result tells you the percentage change in that variable that would make the NPV zero. A small percentage means the project is highly sensitive to that input; a large percentage means there's plenty of margin.

Why sensitivity analysis is useful

• It highlights the variables that matter most to the decision.
• It focuses management attention on the riskiest assumptions.
• It supports 'what-if' thinking without needing full probability data.

Its limitations

Sensitivity analysis changes one variable at a time, so it ignores the way variables interact, and it doesn't attach probabilities to outcomes. It shows how far a variable can move, not how likely that move is.

Sensitivity analysis is a common ACCA FM (and AFM) requirement, and the marks come from the correct calculation plus a clear interpretation of what it means for the decision. Practising these questions and marking them against the official ACCA scheme with The 50% Club shows you exactly where your method or interpretation loses marks.