What does sensitivity analysis help identify in financial planning?

Sensitivity analysis is a crucial tool in financial planning that helps identify how different variables affect a project's outcome, particularly in relation to key performance indicators such as net present value (NPV). When conducting sensitivity analysis, the focus is on understanding which variables have the potential to introduce the most uncertainty or risk into forecasts. This analysis assesses how changes in one or several input assumptions, such as sales growth, cost of goods sold, or discount rates, impact the overall financial metrics.

By pinpointing the variables that have the highest forecasting risk, financial analysts can prioritize their focus on those elements that could lead to significant changes in outcomes under various scenarios. This allows for more informed decision-making and better risk management, ensuring that financial plans are robust and adaptable to changes in critical assumptions. The identification of high-risk variables is vital for anticipating potential challenges and opportunities in the financial planning process.

The other options do not reflect the primary purpose of sensitivity analysis. While recognizing consistent forecasts or projects with lower investments is valuable, they do not align with the core function of sensitivity analysis, which is to assess risk and variability in financial projections. Similarly, no analysis can guarantee positive NPV outcomes under all scenarios, as that would contradict the inherent uncertainty the analysis aims to address.