Sensitivity analysis is used to incorporate risk into a cost benefit analysis. There are several approaches to sensitivity analysis. These approaches vary from applying percentage changes to benefit and cost categories to Monte Carlo Simulation on costs and/or benefits. This video compares these approaches assessing their strengths and weaknesses.
The video looks at the depth of analysis necessary for a reliable sensitivity analysis. This involves revisiting key drivers and assumptions applied to the initially analysis. Key drivers and assumptions are often represented by the parameters used to calculate benefits and costs. The parameters which cause the greatest fluctuation in the results are recommended to be focused on in the sensitivity analysis.
The video looks at how there is a greater focus on cost when it comes to detailed analysis of risk. Monte Carlo Simulation is regularly applied to costs but almost never to benefits. The video explains how Monte Carlo Simulation can be applied to both benefits and costs. It explains that Monte Carlo Simulation should be applied to the net present value (NPV) and benefit cost ratio (BCR) rather than to benefits and costs separately. I have another video that explains how sensitivity analysis can be applied using Microsoft Excel. I will add the link once the video is uploaded.
The video can be watched at the link below:
The cost benefit analysis series is available at:
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