ACCA Performance Management (F5) Certification Practice Exam

Which is a strength of sensitivity analysis?

1. It requires extensive theoretical knowledge

2. It is too complex for practical judgment

3. It identifies crucial areas for project success

4. It focuses solely on numerical data

The correct answer is: It identifies crucial areas for project success

Sensitivity analysis is a valuable tool in performance management and project evaluation, particularly for assessing how changes in key assumptions or input variables can affect the outcomes of a project or investment decision. One of its main strengths lies in its ability to identify crucial areas that can significantly impact project success. When conducting sensitivity analysis, analysts can modify key variables such as costs, revenues, or market conditions to see how these changes influence the overall results. This process enables decision-makers to pinpoint which assumptions are the most critical to the project's viability. Understanding these sensitive variables helps in risk management, allowing for better planning and contingency strategies to be developed. Furthermore, by focusing on the aspects that are most influential on the outcome, organizations can allocate their resources and attention more effectively towards mitigating risks and enhancing chances of success. This leads to more informed decision-making and increases the likelihood of achieving favorable outcomes. The other options present mischaracterizations of sensitivity analysis. It does not require extensive theoretical knowledge; rather, it relies on practical application and can be understood with basic financial or project management concepts. It is user-friendly and designed to reinforce practical judgment rather than complicate it. Additionally, while it is based on numerical data, sensitivity analysis incorporates qualitative insights as well, as context is critical in understanding the