Sensitivity Analysis

Sensitivity analysis is a process which helps us to understand what will happen to the value of our project if any of our key inputs or assumptions were to change.

The basic process for conducting a sensitivity analysis involves changing each input variable one at a time, and assessing the effect that has on the total project value. Usually we will just look at the effect on the Net Present Value of the project, but we could equally look at the IRR or the Payback Period as a measure.

The key point is that we only change one variable at a time in our financial model, leaving all the other variables constant. This allows us to see what effect each different assumption would have if it proves to be incorrect.

Also, we usually only change each variable within a range that we expect might reasonably occur – so for example we wouldn’t test a case where our product price dropped to zero, or where the cost of a mining truck was only $1000. We want to see the reasonable range of values our project might end up with.

Finally, within the range for a given variable, we usually pick four to six particular values which we will use to do the sensitivity cases. This gives us enough information to see the effect and plot the result on a graph, but not too many that the calculation work becomes too great.