Sample Essay

Sample Essay

Sensitivity Analysis

Sensitivity analysis is the procedure which determines how the NPV of a particular project or company would change with the change in input variables while calculating NPV such as expenses, depreciation or discounting factor. Sensitivity analysis helps management in making decisions about the future based on the fluctuations in these variables.

The analysis begins with a base case which is also called the expected scenario and the changes are made to this scenario for a pessimistic or optimistic approach. In the analysis the input variables are changed by increasing or decreasing the input variables by some percentage points to reveal the affects of these changes on the NPV. The variables are changed with respect to various scenarios such as increasing or decreasing the level of expected sales or expenses[1].  In the sensitivity analysis of Wall-Mart, the intrinsic value per share would be tested instead of the NPV as we have calculated the intrinsic value per share instead of NPV.

[1] Brigham, E., & Ehrhardt, M. (2001). Financial Management: Theory and Practice 11th Edition. Florence: South-Western Educational Publishing.

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