Answered: Although both sensitivity and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Although both sensitivity and break-even analyses are useful, they have limitations. What are they?

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Step 1

Sensitivity Analysis is a technique, which is used to fuse unpredictability into dynamic processes by taking each dubious factor into account, and ascertains the change that would be important in that factor before the first choice is turned around. Normally, it includes 'consider the possibility that' or 'what if' type questions.

Limitations of Sensitivity Analysis :

It expects that changes to factors can be made autonomously, for example material costs will change independent of the different factors. Simulation permits us to change more than each factor in turn.
It just recognizes how far a variable is required to be transformed; it doesn't take a gander at the likelihood of such a change.
It gives data based on which choices can be made, yet it doesn't highlight the right choice straightforwardly.

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