Sensitivity Analysis NPV Calculation Example
Sensitivity analysis NPV calculation is a crucial tool for project evaluation, helping to understand how changes in key variables impact the net present value (NPV) of a project.
- Select the discount rate.
- Enter the initial investment.
- Enter the annual cash flow.
- Click ‘Calculate’.
The NPV is calculated using the formula: NPV = ∑ [CFt / (1 + r)^t] – Initial Investment, where CFt is the cash flow in year t, r is the discount rate, and t is the year.
| Discount Rate | NPV |
|---|---|
| 10% | $500,000 |
| 12% | $400,000 |
| 15% | $300,000 |
- Consider multiple scenarios to account for uncertainty.
- Use a range of discount rates to test project robustness.
What is the difference between NPV and IRR?
NPV and IRR are both used to evaluate projects, but they focus on different aspects. NPV considers the present value of all cash flows, while IRR estimates the rate at which the net present value of a project equals zero.
Learn more about NPV from Investopedia
Read about NPV in detail from Cengage Learning