"Profitability of any business is sensitive to several factors that prompts the analyst to prepare Sensitivity Analysis to help in Management decisions." Comment.

Financial performance of any business depends on many factors. The needs of the customer with respect to the product or service are a major factor. Market competition is another factor. Government policies may change cost and hence the price. The product may face obsolescence due to new technologies. Cheaper alternatives may affect the customer preference. Thus, the profitability of any business may be sensitive to any of the factors. If we take these factors as independent variables, then given a change in or more of the variables affect the profitability. This technique is known as "Sensitivity Analysis". This technique can also be used to test the validity of any model. For example, in business valuation, there are variables such as discount rate, future growth rate, market share, beta value, required rate of return, etc. Each of these factors can be varied to test the business valuation model.