Question

8. A Sensitivity analysis allows for forecasting using historical, true data. Please make and provide an example of sensitivity analysis, please be creative in making it!

Answer 1

Sensitivity analysis allows for forecasting using historical, true data. By studying all the variables and the possible outcomes, important decisions can be made about businesses, the economy, and about making investments.

EXAMPLE:-

Assume Mr. Roman is a sales manager who wants to understand the impact of customer traffic on total sales. He determines that sales are a function of price and transaction volume. The price of a widget is $1,000, and Roman sold 100 last year for total sales of $100,000. Roman also determines that a 10% increase in customer traffic increases transaction volume by 5%. This allows him to build a financial model and sensitivity analysis around this equation based on what-if statements. It can tell him what happens to sales if customer traffic increases by 10%, 50%, or 100%. Based on 100 transactions today, a 10%, 50%, or 100% increase in customer traffic equates to an increase in transactions by 5%, 25%, or 50% respectively. The sensitivity analysis demonstrates that sales are highly sensitive to changes in customer traffic.