Though NPV is the best capital budgeting approach conceptually, it has been criticized in practice for giving managers a false sense of security. Sensitivity analysis shows NPV under varying assumptions, giving managers a better feel for the project’s risks. Unfortunately sensitivity analysis modifies only one variable at a time, but many variables are likely to vary together in the real world. Scenario analysis examines a project’s performance under different scenarios (such as war breaking out or oil prices skyrocketing). Finally, managers want to know how bad forecasts must be before a project loses money. Break-even analysis calculates the sales figure at which the project breaks even. Though break-even analysis is frequently performed on an accounting profit basis, we suggest that a net present value basis is more appropriate.

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