What are the advantages and disadvantages of sensitivity analysis?

由人工智能和领英社区提供技术支持

When you are planning a capital budgeting project, you need to consider the potential risks that may affect your expected cash flows and returns. One of the methods you can use to identify and evaluate these risks is sensitivity analysis. In this article, you will learn what sensitivity analysis is, how it works, and what are its advantages and disadvantages for capital budgeting decisions.

此文章中的业界达人

由社区从 8 条内容中精选。了解更多

1 What is sensitivity analysis?

Sensitivity analysis is a technique that measures how the changes in one or more input variables affect the output of a model or a system. For example, if you are estimating the net present value (NPV) of a project, you can use sensitivity analysis to see how the NPV changes when you vary the discount rate, the initial investment, the operating costs, or the revenues. By doing this, you can identify which variables have the most impact on the project's value and risk.

添加您的观点

Doreen L.

Director of Property Management | Major Markets
(已编辑)
举报内容
Sensitivity is a great tool to measure value however it can be easily manipulated in the creators favor. If you are reviewing a sensitivity make sure you check that the metrics are accurate and the data is not skewing too greatly in one direction

已翻译

赞
Meng Hock TAN ????

General Assurance at PwC Singapore | Associate (ISCA) | SUSS Alumni Committee Member | Lifelong Learner
举报内容
Sensitivity analysis can be used to help financial managers to consider the different possible outcomes of their decision alternatives based on the input variables such as sales quantity level to predict the sales revenue over the next 3 years for instance.

已翻译

赞

2 How to conduct sensitivity analysis?

Conducting sensitivity analysis requires you to define a base case scenario, which consists of assumptions and values used to calculate the output of your model. Then, select the input variables you want to analyze and assign them a range of possible values based on historical data, expert opinions, or market research. Calculate the output of your model for each value of the input variable while keeping the other variables constant. You can use a spreadsheet or software tool to automate this process. Once you’ve plotted the results on a graph or table, you can calculate the percentage change in the output for each unit change in the input variable (called the sensitivity coefficient). Finally, interpret the results and draw conclusions about the sensitivity and risk of your model.

添加您的观点

3 What are the advantages of sensitivity analysis?

Sensitivity analysis offers several advantages for capital budgeting decisions, such as helping to understand how different factors influence the project's performance, identify key drivers of value and risk, test the robustness of assumptions and estimates, explore different scenarios and outcomes, and communicate the project's feasibility and attractiveness to stakeholders and investors.

添加您的观点

Meng Hock TAN ????

General Assurance at PwC Singapore | Associate (ISCA) | SUSS Alumni Committee Member | Lifelong Learner
(已编辑)
举报内容
Sensitive analysis is a great tool that can be understood easily. It allows the financial manager or the management to see exactly where they can make improvements and enable people/companies to make sound decisions about their investments and helps with the forecasting of sales revenue cycle.

已翻译

赞

4 What are the disadvantages of sensitivity analysis?

Sensitivity analysis for capital budgeting decisions can be complex and time-consuming, particularly when there are multiple input variables and a wide range of values to consider. It can also be misleading or inaccurate if unrealistic or arbitrary values are used for the input variables, or if the interdependence and correlation between them is overlooked. Additionally, it can be incomplete or insufficient if important input variables or scenarios are omitted, as well as biased or subjective if the input variables or values are chosen based on preferences or expectations rather than objective data. Furthermore, it can be over-simplified or over-generalized if it assumes that the input variables change linearly and proportionally, or if the effects of uncertainty and variability on the output are ignored.

添加您的观点

Meng Hock TAN ????

General Assurance at PwC Singapore | Associate (ISCA) | SUSS Alumni Committee Member | Lifelong Learner
(已编辑)
举报内容
Certainly, sensitive analysis is also not without its own disadvantages. Sometimes, if the accountant or financial manager uses historical cost data to forecast the effect of variables on outcomes, the predicted outcomes could be inaccurate.

已翻译

赞
Fahad Irfan

12k+ | S2 (KSA ????) | Qualified ACCA ???? & CA???? (F) | Auditor | Accountant | Finance | VAT | Tax Specialist | Data Scientist & Expert | SEO Expert | SAP S4/HANA | QuickBook expert | YA Alumni | Deloitte Alumni
举报内容
Sensitivity analysis does not assign probabilities to different outcomes. It shows what happens if a variable changes but does not indicate how likely these changes are. Decision-makers may not have a clear understanding of which scenarios are most realistic or probable, making it difficult to assess the risk level effectively

已翻译

赞

5 How to improve sensitivity analysis?

To improve the quality and usefulness of sensitivity analysis for capital budgeting decisions, you should ensure that reliable and relevant data and sources are used to determine the range and values of your input variables. Utilizing multiple input variables and scenarios can help capture the complexity and uncertainty of the project's environment. Additionally, sensitivity analysis should be used in combination with other risk identification and evaluation methods, such as scenario analysis, simulation, or decision trees. Finally, sensitivity analysis should be used as a tool for learning and improvement, not as a substitute for judgment and experience.

添加您的观点

Hal Clay

Global Senior Manager with Top Tier MBA and Engineering Degrees plus 15-years experience in Program Management, Operations and Finance.
举报内容
SA is something that has to be done and taken into account. However, people like myself can explore very unlikely variables and end up talking themselves out of a great capital investment. Try to remember that your initial inputs should be your closest to the pin expected values. Use the SA results to identify areas you need to focus on once the project has begun. This way you aren't ignoring issues but you're also actively investing capital funds. Just remember, a project that ends up just breaking even or even losing a little money is still a shot at the target. You'll never get ahead if you're afraid to pull the trigger. Small losses are learning experiences that can be beneficial to a company.

已翻译

赞
Pankaj Chawla (Consultant Speaker Strategist)

TEDx Speaker | LinkedIn Top Voice | Brand Partnerships | Business Strategist | Mission-"To make MSMEs of today, MNCs of tomorrow". I Help People fulfil their Financial/Non-Financial Dreams in structured manner.
举报内容
sensitivity analysis offers valuable insights for risk assessment, decision-making, and resource allocation. However, it requires careful consideration of data accuracy, assumptions, and potential complexities. Businesses should use sensitivity analysis as a part of their decision-making toolkit, alongside other tools and methodologies, to gain a comprehensive understanding of their projects' uncertainties and make informed choices.

已翻译

赞
Simon Pritchard GAICD

Dad. Board and C-suite strategic advisor. Better Big Business Bets.
举报内容
Rather than using "blind sensitivities" (e.g. +/- 10%), range analysis is a facilitated thinking process that can be used to rigorously quantify the underlying uncertainty. The range analysis facilitator poses a series of questions to a diverse group of experts, such as what's the best, and what's the worst this could be. External benchmarks should be referenced. This process adds objectivity and meaning to the range, and can also be used to de-bias the best estimate.

已翻译

赞

Capital Budgeting

+ 关注

给文章评分

我们借助人工智能创建了此文章。您认为这篇文章怎么样？

很棒不太好

举报此文章

查看全部

What are the advantages and disadvantages of sensitivity analysis?

1

2

3

4

5

1 What is sensitivity analysis?

2 How to conduct sensitivity analysis?

3 What are the advantages of sensitivity analysis?

4 What are the disadvantages of sensitivity analysis?

5 How to improve sensitivity analysis?

Capital Budgeting

给文章评分

感谢您的反馈

更多Capital Budgeting相关文章

更多相关阅读内容