Sensitivity analysis in project Management example
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Definition of Sensitivity AnalysisIt is a situation similar to “what-if” analysis or the use of simulation analysis. It is used to predict the outcome of a decision based on a certain range of variables. It is especially very useful in cases where investors and stake-holders are evaluating the projects and proposals from the same industry or from different industries but driven by similar factors. Uses of Sensitivity AnalysisHere we discuss the uses of sensitivity analysis:
Forms of Outcomes in Sensitivity Analysis:
Examples of Sensitivity Analysis (With Excel Template)Let’s take an example to understand the calculation of Sensitivity Analysis in a better manner. Sensitivity Analysis – Example #1The expected Cash Flow forecast for the next 12 years is provided (see below). The cost of capital is 8 %, assuming the variables remain constant and determine the project’s Net Present Value (NPV). More details of the calculation are in the attached excel sheet. Explanation Sensitivity Analysis is used to know and ascertain the impact of a change in the outcome with the inputs’ various projected changes.
Sensitivity Analysis – Example #2Example of J&B Inc. The original or expected Sales Volume is $582,401 arising out of 7882 units and at the rate of $73.89.To conduct the sensitivity analysis – J&B Inc conducted two models with different input variables for the Pessimistic Model and the Optimistic Model, as seen highlighted below: Based on these pessimistic and optimistic values of the sales and variable costs, the net income after taxes can be seen as varying. Hence, on creating the two models, we aim to arrive at a conclusion or analysis of the input factors to reach the desired Net Income figures. The estimation of sales and, therefore, the variable costs helps decide and has a great impact on the NPV of given projects. The fixed costs and any changes to it become insignificant but remain constant across different levels of sales volume. Relevance and UseAs per the requirement of the decision-making area, the variables and their types would differ. Accordingly, the parameters are decided, and the sensitivity analysis is conducted. Sensitivity Analysis, among other models, is put much more to use as a decision support model than merely a tool to reach one optimal solution. However, this form of analysis becomes ambiguous when the terms “pessimistic” and “optimistic” become subjective to the user and the levels considered are set as per the user. The uncertainty of the output due to the different sources of inputs and their uncertainty results to uncertain analysis. This, in turn, leads to the quantification of uncertainty and therefore, the need to run the sensitivity analysis comes to the picture. This is a method, again, to re-calculate the output based on different alternative assumptions. The common areas of application of the models of sensitivity analysis are:
Recommended ArticlesThis is a guide to Sensitivity Analysis. Here we discuss how to calculate sensitivity analysis along with practical examples. we also provide a downloadable excel template. You may also look at the following articles to learn more –
What is an example of sensitivity analysis?An example of a sensitivity analysis would be to calculate how much a business can increase its prices, before it starts to negatively affect customer sales. In this example, it is a way to see how sensitive your customers are to changing prices, so a business can gauge how much to increase them by.
What is a sensitivity analysis in project management?What is Project Sensitivity? Project sensitivity is a holistic evaluation of how likely it is that a project will succeed through data-driven forecasting. It also identifies risks, quantifies their impact, and separates high-risk tasks from low ones.
How do you write a sensitivity analysis?To perform sensitivity analysis, we follow these steps: Define the base case of the model; Calculate the output variable for a new input variable, leaving all other assumptions unchanged; Calculate the sensitivity by dividing the % change in the output variable over the % change in the input variable.
How do you measure project sensitivity?If your project schedule has multiple critical paths, then your project schedule is considered sensitive. If your project schedule only has one critical path and there is slack among the various tasks, then your project schedule is considered insensitive.
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