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Project risk refers to the potential for a project’s actual outcomes to differ from expected outcomes, especially in terms of returns and costs. In capital investment and financing decisions, risk analysis is essential to ensure that investments align with the firm’s risk appetite and provide adequate returns. Several techniques are used to measure project risk, each providing unique insights into the possible variability of cash flows and returns. 1. Sensitivity Analysis Sensitivity analysis evaluates how sensitive a project’s outcome (e.g., Net Present Value or Internal Rate of Return) is to changes in one key input variable while keeping others constant. Common variables include sales volume, cost of raw materials, and discount rate. This technique helps identify the most critical factors affecting project viability. For example, if a small change in sales volume causes a significant change in NPV, then sales ____ _________ ___ _____ _________.
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