Guidance notes - Sensitivity analysis

A simple sensitivity analysis of the major components that form the PSC is a useful way of understanding the impact of changes in these variables on the overall NPC of the project. Examples of variables that may be part of a sensitivity analysis include:

•  capital costs

•  operating/recurrent costs

•  discount rate

•  inflation rate

•  maintenance and refurbishment costs.

A graphical representation of the results is a good, if limited, way of illustrating, the relationship of a particular cost to the overall cost of the project. A 'spider' diagram graphs the costs relative to one another, with the X axis detailing the percentage change in the cost, and the Y axis detailing the effect of the change on the PSC. Therefore, on the graph, the steeper the gradient of the line, the more sensitive is the total PSC to changes in the particular variable, compared to the other costs tested.

Note that these results should be reviewed with some caution because each cost is analysed separately. In reality, these costs are often dependent on each other. A sensitivity analysis follows on the PSC simple valuation technique and advanced valuation technique to illustrate the results under both techniques. Only one technique would be applied to a project at any one time.