Sensitivity Analysis

All economic evaluation involving forward projection inevitably brings a certain amount of risk and uncertainty. Because of the highly subjective nature in selection of parameters, it is desirable to show the systematic variation over a range of scenarios for each parameter in turn.

A sensitivity analysis should be performed after completing the initial economic evaluation and determining the ranking or preferred option. The process can also be used to rank variables in order of sensitivity. Factors found to be most influential on the results should be carefully checked for accuracy and the degree of risk associated with their estimation or prediction.

Sensitivity analysis (or "what if" analysis) can be carried out by varying each parameter one at a time. By this approach the uncertainty associated with any parameter and its importance can be examined.

The alternative approach is to undertake a "scenario analysis" where a collection of parameters and assumptions which define a particular scenario are varied accordingly. This method provides an overview of the general changing pattern in the various environments.

The sensitivity analysis will assist to determining the nature and effect of risk and expand the evaluator's knowledge of the project by identifying factors that exert a major impact on the project.