## Related questions with answers

Define (a) sensitivity analysis, (b) scenario analysis, and (c) simulation analysis. If GE were considering two projects (one for $500 million to develop a satellite communications system and the other for$30,000 for a new truck), on which would the company be more likely to use a simulation analysis?

Solution

VerifiedSensitivity analysis measures percent change in NPV as a result of a given percent change of a single input, all else constant. This analysis is the most commonly used risk analysis and answers `what if' questions. The base NPV is first computed, or the most likely case. Other cases will then be simulated and then compared to the base case to find the percent change in NPV. Take note that in sensitivity analysis, the assumption is that only 1 input will change.

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