Sensitivity Analysis for NPV in Excel – 4 Steps

What Is Sensitivity Analysis?

Sensitivity Analysis determines the impact of a change in an independent variable associated with a product.

You have a three-year project. The revenue from the project depends on 3 variables: selling price, variable cost, and annual sales. To know how changes in these variables will affect the Net Present Value (NPV) of the project:

Steps 1 – Calculate the Profit Margin

• Enter the following formula in C13 to calculate the margin between cost and sales.

Steps 2 – Estimate the Annual Cash Flow

• Use the following formula in C14 to estimate the annual cash flow.

Read More: How to Use What If Analysis in Excel

Steps 3 – Create a NPV Table

• Create a table showing yearly cash flows (the numbers in brackets are negative):

• Enter the following formula in C21 to get the NPV based on the expected cash flow.

• To forecast how the NPV will change if the selling price falls to a defined minimum, change the formula in C13:

• Extend the NPV table to get the NPV at the minimum selling price.

• • Change the formula in C14 to know what will happen if the annual sales drop to a minimum. Calculate the margin from the expected values.

• Change the formulas for a different variable one by one to complete the following table.

Read More: What-If Analysis in Excel with Example

Steps 4 – Perform a Sensitivity Analysis for NPV

• Create another table to compare the changes in the NPV with the changes in the variables. Use the following formula in F24 to see the change in the NPV.

Read More: How to Build a Sensitivity Analysis Table in Excel

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