What is sensitivity analysis?
Sensitivity analysis is a practice used frequently in the field of financial modeling.
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This kind of analysis is performed in order to estimate how various figures relating to an independent variable can affect the dependent variable of the model. This sensitivity analysis is always done with models that depend upon one or more input variable.
This form of analysis is often referred to as a “What-If” simulation and is often done in order to predict outcomes of different decisions based on different variables.
As such, sensitivity analysis allows you to analyze how the different figures within sets of independent variables affect the end result in different conditions. This also allows you to analyze how changing these independent variables will affect the overall outcome of the dependent variable, enabling you to identify the most important independent variables.
What is the purpose of a sensitivity analysis?
Sensitivity analysis can be very important in business.
Conducting sensitivity analysis allows you to project the impact of specific changes you could make within a project. This allows you to identify the key variables that will have a significant influence on the success or failure of your projects.
Further to this, sensitivity analysis allows you to identify and plan for these impacts that changes in these variables could have, Therefore, you can determine the potentially negative impacts that changes in variables could cause.
By conducting a sensitivity analysis, you can also identify the changes in variables that could have a positive influence over the progress of a project.
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Thus, it will help you to identify changes that could be made to improve performance.
Performing Sensitivity Analysis
To conduct sensitivity analysis most effectively, it needs to be done in an incredibly systematic manner.
There are three key steps to be followed when performing sensitivity analysis:
- Identifying the specific variables which will affect the project
- Calculating the effects that changes to these variables will have
- Giving consideration to these variables in different potential combinations
Sensitivity analysis is often conducted in excel via different formulas.
Why is Sensitivity Analysis Important?
Sensitivity Analysis is incredibly important whenever calculations need different estimations, the effects of which are difficult to project.
Sensitivity Analysis will allow you to project the implications of changes to different variables. This will help you to plan for different possibilities and potential implications of certain changes.