6.2 Weaknesses of sensitivity analysis § it assumes that changes to variables can be made independently, e.g. material prices will change independently of other variables. This is unlikely. If material prices went up the firm would probably increase the selling price at the same time with little overall effect on the NPV. Simulation allows us to change more than one variable at a time.
§ It only identifies how far a variable needs to change; it does not look at the probability of such a change. For example sales volume may appear to be the most crucial variable, but if the firm were facing volatile raw material markets a 65% change in raw material prices would be far more likely than a 29% change in sales volume.
§ It is not an optimising technique, it provides information on the basis of which decisions can be made. It does not point to the correct decision directly.
Illustration 9 – EVs