NPV
Sensitivity Analyses
In
NPV sensitivity analyses, we recognize the impact of future uncertainty of cash
flow on the NPV. We calculate margin of safety for different cash flow items
i.e. revenue, cost, and contribution. Such analyses also give us an idea of
contribution (importance) of each item in the NPV.
1. NPV Sensitivity analyses for Cost
NPV
Sensitivity analyses for cost are performed by calculating the margin of safety
for cost. This margin of safety shows that what % of cost increase would make
the NPV zero.
2. NPV Sensitivity analyses for Revenue
NPV
Sensitivity analyses for revenue is performed by calculating the margin of safety
for revenue, that shows that how much decrease in revenue will bring the NPV at
zero level.
3. NPV Sensitivity analyses for
Contribution
NPV
Sensitivity analyses for contribution is performed by calculating the margin of
safety for contribution, which shows that how much decrease in contribution in
terms of percentage will bring NPV to zero.
