How do I run sensitivity and breakeven analysis on a capital project?

Question

AcadiFi · Accepted Answer

Sensitivity analysis changes one input at a time and records the NPV response. Breakeven analysis finds the input value at which NPV = 0. Together they answer 'which drivers matter and how much room do we have?'

For Parrsbridge's distribution center ($42M capex, 12-year life, 9% WACC), a structured process: (1) Compute base-case NPV. (2) For each key driver (throughput volume, unit margin, operating cost per package, terminal value, capex overrun, WACC), flex +/- 10% and +/- 25%. (3) Plot tornado diagrams ranking drivers by NPV impact.

Suppose the base NPV is $11.2M. A 10% drop in unit margin kills $8.6M of NPV; a 10% drop in throughput kills $6.3M; a 10% WACC increase kills $2.8M. Margin is clearly the top risk.

Breakeven then asks: at what unit margin does NPV hit zero? Solve numerically or with Excel's Goal Seek. If base margin is $4.10 and breakeven is $3.48, you have roughly 15% downside before the project destroys value. Compare this cushion to realistic downside scenarios.

For AcadiFi CFA candidates: sensitivity is static and one-variable-at-a-time, so it ignores correlations between inputs. That's where scenario and simulation analysis come in. Nonetheless, sensitivity remains the fastest way to rank drivers and spot model errors. Always sensitize capex and revenue growth — these are almost always among the top three drivers in practice.

How do I run sensitivity and breakeven analysis on a capital project?

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