Lecture 2

Question 1

What is the difference between Sensitivity Analysis and Scenario Analysis?

Answer 1

Sensitivity => Change a single variable at a time
Scenario => Change all the variables at the same time

Question 2

What does the matrix provided by Sensitivity Analysis show?

Answer 2

NPVs under different cases based on individual variable changes.

Question 3

What are the drawbacks of Sensistivy Analysis?

Answer 3

• Financial managers might inflate the numbers / manipulate it for their personal interests such as getting a promotion
• Several key assumptions might be related and change simultaneously so not accurate if an optimistic approach to only change one