Risk estimation using sensitivity analysis of an investment project.

The essence of the sensitivity analysis of an investment project, consists in a comparative analysis of the influence of different factors on an investment's key indicator – its effectiveness. This analysis tries to assess the impact of changes in input data on the final characteristics of the project. A credible sensitivity analysis typically follows these steps: (1) Identifying the key indicator that measures the effectiveness of the investment; (2) Determining the factors which are in a state of uncertainty; (3) Establishing the nominal and limit (lower and upper) values of the uncertain factors, selected at the second step of the procedure; (4) Evaluating the key indicator for all selected limit values of the uncertain factors; (5) Plotting the sensitivity graph for all uncertain factors (Spider Graph). This method is a good illustration of the influence of individual factors on the success of the project. In the process of sensitivity analysis, the risk does not change immediately. Instead, the resilience of the project to changes in the parameters is determined. The higher the resistance to changes, the lower its risk. Thus, the project with the lowest NPV sensitivity to parameter changes is considered less risky. In the current paper is presented a method for risk evaluation by analyzing the sensitivity of an investment project. Also, the sensitivity of the project to the change in the discount rate E and the cash flows CFi is determined. Then, the probability of NPV being less than a certain value K is examined. Finally, a spider graph is created. [ABSTRACT FROM AUTHOR]