Conduct a sensitivity analysis showing how sensitive the project is to operating expenses and to the cost of capital. Explain.

A sensitivity analysis is an analytical tool used to identify the effect of changes in certain key variables on a project’s cash flows. For example, when it comes to operating expenses and cost of capital, it can help show how sensitive the project is to these parameters by visually displaying their impact on different scenarios.

For instance, if the operating costs increase beyond a certain point then it could render the project unprofitable and therefore not be worth pursuing. Similarly, if there is an increase in cost of capital then it would make any investments more expensive which could also adversely affect profitability. Therefore conducting a sensitivity analysis allows us to assess how vulnerable the project may be to changes in these factors so that we can plan accordingly and ensure its success.