Sensitivity Analysis (Treatment of Uncertainty)

– It is the process of re-working the project cost and analysis of a proposed project to judge how vulnerable the investment is to change in price of input, price of output, change in time of implementation and change in productivity (yield).

–  Several times when the project is under execution, certain things go wrong as a result the desired benefits cannot be achieved within the stipulated time frame.

– For example, the actual execution of the project is delayed or the cost exceeds the original estimated cost (cost over-run), fall in yield, fall in prices. In such cases, the results get fairly changed.

– Many times, the IRR and NPW thus get reduced or the BCR becomes negative from positive.

– In order to take care of this problem, while the projects are under preparation or under examination, certain assumptions are applied for testing the viability of the project.

– This gives a fairly good picture as to what will be the fate of the projects if such problems occur.