Sensitivity analysis—the analysis of changes made to significant variables in order to determine their effect on a planned course of action.
　　The cash flows, probabilities or cost of capital are varied until the decision changes (i.e. NPV becomes zero). This will show the sensitivity of the decision to changes in those elements.
　　Therefore, the estimation of IRR is an example of sensitivity analysis, in this case on the cost of capital.
　　Sensitivity analysis can also be referred to as "what if?" analysis.
　　Method
　　Step 1 Calculate the NPV of the project on the basis of best estimates.
　　Step 2 For each element of the decision (cash flows, cost of capital), calculate the change necessary for the NPV to fall to zero.
　　The sensitivity can be expressed as a percentage change.
　　For an individual cash flow in the computation:
　　Sensitivity = NPV/ PV of flow considered × 100%
　　Advantages of Sensitivity Analysis
　　It gives an idea of how sensitive the project is to changes in any of the original estimates.
　　It directs management attention to checking the quality of data for the most sensitive variables.
　　It identifies the critical success factors for the project and directs project management.
　　It can be easily adapted for use in spreadsheet packages.
　　Limitations of Sensitivity Analysis
　　Although it can be adapted to deal with multi-variable changes, sensitivity analysis is normally used to examine what happens when one variable changes and others remain constant.
　　Assumes data for all other variables is accurate.
　　Without a computer, it can be time-consuming.
　　Probability of changes is not considered.

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