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sensitivity analysisa means of testing the extent to which the results of an analysis of an INVESTMENT project or company budget would change if one or more of the assumptions on which the analysis is based were to change. For example, in estimating the rate of return on an investment, such as a new machine, a firm will need to input various assumptions about the cost of the machine, the anticipated life of the machine, its running costs, annual output, residual value etc. Sensitivity analysis shows how much the expected rate of return on the machine would change if any one of these factors were to be higher or lower than originally expected. Sensitivity analysis thus allows managers to anticipate a range of possible outcomes where uncertainty about the factors involved make it impossible to predict the exact outcome. See UNCERTAINTY AND RISK, DISCOUNTED CASH FLOW.
Use of spreadsheets to analyze an income-producing property or a development project, and then changing key assumptions in order to view the changes this causes. The creation of a best-case,worst-case,and most-likely-case pro forma is one type of sensitivity analysis.