5(b) - The requirement here was to critically discuss if sensitivity analysis would assist a company in assessing the risk of an investment project. Many answers were not able to gain high marks, for several reasons.

Many answers were able to explain that sensitivity analysis considered the relative change in a project variable needed to make the NPV zero, or the change in the NPV arising from a specified change in a given project variable.

Some answers discussed the idea of the key or critical variable, which was the project variable where the smallest relative change resulted in a zero NPV.

The limitation of only changing one variable at a time in sensitivity analysis was often mentioned, with better answers pointing out that in reality project variables are often interrelated to a greater or lesser extent.

A key point in providing a good answer to this question was recognising that risk could be quantified using probabilities, unlike uncertainty. Having recognised this, better answers pointed out that, as sensitivity analysis did not consider probabilities, it could not assist a company in assessing the risk of an investment project.

Even though the requirement was for a critical discussion, many answers attempted to calculate sensitivities of project variables. No credit was given for these calculations because they were not required.