Discuss the highlights of the following analysis and provide 2 additional points with examples.:

Sensitivity analysis is essential in assessing a project's risk and how its NPV responds to input variables or parameter changes. Financial variables include costs, prices, interest rates, and other parameters, all of which are critical in determining the viability and profitability of a project. Sensitivity analysis identifies the crucial factors that substantially impact NPV, enabling strategic decision-making amidst market volatility and uncertain landscapes.

For instance, PRI and Carbon Tracker (2017) discuss the NPV comparison of two portfolios, 2D-compliant (2D) and Business As Usual (BAU), to comprehend their cost structures and relative values, such as oil prices and their effect on leverage and volatility. 2D outperforms BAU at lower oil prices due to its lower cost structure, higher margins, and alignment with climate goals. The impact on high-cost, non-2D compliant oil projects emphasizes that projects require oil prices to average above a specific threshold to maintain viability. However, achieving the price threshold might conflict with global climate targets. BAU has higher volatility and risk due to its higher sensitivity to oil prices. Thus, investors should consider a higher discount rate when measuring the NPV of projects within the BAU portfolio.

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The highlighted analysis emphasizes the importance of sensitivity analysis in project evaluation particularly in assessing the risk and profitability of a project by examining how changes in input var... View the full answer