6. Sensitivity Analysis

The chapter begins by defining sensitivity in projects, whatever their nature. The main word here is uncertainty, because no matter the kind of project, there is always uncertain data and predictions, vague information, unexpected people or stakeholder reactions, deviations in prices, labor performance different from estimated, etc. Sensitivity analysis is designed to examine the response or reaction of an output variable, such as the IRR, the NPV or the Payback Period, to variations of input variables, such as sales volume, price, etc. To this extent, this chapter starts by examining variations on task durations in a schedule, and introducing concepts such as the Tornado Diagram and the Criticality Index. It also refers to variations associated with the outcomes of the project’s profitability linked with economic and financial issues, as well as those related to equipment and material costs. The chapter examines the sensitivity in even more realistic cases where variations from different variables acting simultaneously and in different scenarios. The chapter concludes by examining the Sensitivity Ratio or Elasticity, a very well-known and widely used tool in Economics.