Why perform sensitivity analysis? Of what use is sensitivity analysis where good probability estimates are difficult...

Why perform sensitivity analysis? Of what use is sensitivity analysis where good probability estimates are difficult to obtain?

Solutions

Expert Solution

For a given set of assumptions, the sensitivity analysis is used to examine the impact of the various values of an independent variable upon that of a particular dependent variable. Hence for sensitivity analysis, it is essential that there should be a presence of one or more than one variable to determine the causal-effect relationship between the two for different values of independent variables to that of a dependent variable. Hence, for this reason, sensitivity analysis is performed.

When good probability estimates are difficult to obtain, it is essential that the values of the independent variables are ascertained first because the analysis is based upon simulation technique. Hence for a certain range of variables, if the probability estimates are difficult to obtain, sensitivity analysis can at least help to simulate the what-if scenario and estimate the anticipated outcomes of the same. In this case, the variables shall be separated and then, the range of probable outcomes could be recorded for better estimation.

keosha answered 1 month ago

Next > < Previous

Related Solutions

What is sensitivity analysis? Why is it important for managers?

What are sensitivity analysis, scenario analysis, break-even analysis, and simulation? Why are these analyses important, and...

What are sensitivity analysis, scenario analysis, break-even analysis, and simulation? Why are these analyses important, and how should they be used? please provide APA references !

1. Perform sensitivity analysis on the following project by first finding the NPV for the base...

1. Perform sensitivity analysis on the following project by first finding the NPV for the base case, then for a 10% decline in quantity sold and a 10% increase in quantity sold. Investment = $270,000 Straight line depreciation over 3 years quantity sold per year = 20,000 Price per unit = $20 Operating Cost = $10 per unit (all variable) Tax rate 25% cost of capital 10% Project will have a 3-year life...

What is the primary difference between a sensitivity and a scenario analysis? A) in a sensitivity...

What is the primary difference between a sensitivity and a scenario analysis? A) in a sensitivity analysis, you allow one assumption to differ from the expect level at a time. In a scenario analysis, you allow at least two assumptions to differ from the expected level at the same time. B)In a sensitivity analysis, you allow one assumption to differ from the expected level at a time. In a scenario analysis, you solve for the value of one assumption that...

What does a decision tree tell us and why is it useful? What is sensitivity analysis...

What does a decision tree tell us and why is it useful? What is sensitivity analysis and why is it useful?

1) Describe "Sensitivity Analysis" within the Linear Programming context. Why is sensitivity analysis important? 2) Discuss...

1) Describe "Sensitivity Analysis" within the Linear Programming context. Why is sensitivity analysis important? 2) Discuss the impact of the changes in the following to your optimal solution: objective function coefficient resources or right-hand-side values. I need at least 200 words

a) Explain what sensitivity analysis is giving examples of how a financial institution will use it....

a) Explain what sensitivity analysis is giving examples of how a financial institution will use it. Discuss the difference between sensitivity analysis and scenario analysis.

Perform a sensitivity analysis for the effects of key variables (e.g., sales growth rate, cost of...

Perform a sensitivity analysis for the effects of key variables (e.g., sales growth rate, cost of capital, unit costs, sales price) on the estimated NPV or IRR in order to demonstrate the sensitivity of the model. The Scenario analysis of several variables simultaneously is encouraged (but not required).

1. What is the difference between scenario analysis and sensitivity analysis? How might you use each...

1. What is the difference between scenario analysis and sensitivity analysis? How might you use each during the capital budgeting process? 2. What is the concept of operating leverage? Describe a scenario where a high degree of operating leverage would be positive for a company and one in which it would be negative.

What are some approaches to assigning probability? Which could be labeled as difficult to understand? Why?

Subjects