Sensitivity analysis is a technique that indicates how much a project$$s NPV will change in response to a given change in an input variable, other things held constant.

The analysis begins with expected values for unit sales, sales price, fixed costs, and variable costs to give an expected, or base case, NPV$.$ A series of $$what if$$ questions may then be asked to find the change in NPV$,$ given a change in one of the input variables.

Each variable is changed by several specific percentage points above and below the expected value, holding other things constant. The resulting set of NPVs is plotted against the variable that was changed.

The steeper the slope, the more sensitive NPV is to changes in each of the inputs.

When comparing two projects, the one with the steeper sensitivity lines would be regarded as riskier, because for that project a relatively small error in estimating the input variable would produce a large error in the project$$s expected NPV$.$

NPV break$-$even analysis determines the value of an input that causes the NPV to be zero.

Sensitivity analysis can provide useful insights into the riskiness of a project.