Sensitivity Analysis

A

One of the drawbacks of Sensitivity Analysis is that it ignores the range of likely values that key variables can take. This is rectified using Scenario Analysis.

The correct answer is B. changes in some of the key variables.

Sensitivity analysis is a technique used in financial analysis to assess how sensitive a project's financial performance is to changes in key variables. It helps in evaluating the potential impact of changes in these variables on the project's profitability and financial viability.

Sensitivity analysis involves varying one variable at a time while keeping all other variables constant to observe the effect on the project's outcome. This allows analysts to identify which variables have the most significant impact on the project's financial measures, such as net present value (NPV) or internal rate of return (IRR).

However, sensitivity analysis does not consider changes in all key variables simultaneously. It focuses on isolating the impact of individual variables on the project's performance. This means that the analysis may not capture the combined effects of changes in multiple variables and their interdependencies.

Option A is incorrect because sensitivity analysis actually considers the range of likely values that key variables can take. By varying the values of key variables within a certain range, analysts can assess the sensitivity of the project's financial measures to different scenarios.

Option B, which is the correct answer, states that sensitivity analysis ignores changes in some of the key variables. As mentioned earlier, sensitivity analysis examines the impact of individual variables while keeping others constant. Therefore, it does not account for simultaneous changes in all key variables.

Option C is incorrect because sensitivity analysis does not ignore all the provided answers. It does consider the range of likely values (Option A) but ignores changes in some of the key variables (Option B).

Option D is incorrect because sensitivity analysis does assess the effect on the IRR (Internal Rate of Return) of changes in project variables. It aims to determine how variations in key variables influence financial measures like the IRR, NPV, or payback period.

In summary, sensitivity analysis is a useful technique for assessing the impact of individual variables on a project's financial performance. However, it does not consider changes in all key variables simultaneously, making Option B the correct answer.