Sensitivity analysis-
- As variations from the base presumptions are expected,
businessmen want to know how much their output (for example,
revenue) will be impacted by the variations.
- Sensitivity analysis aids find the optimal input levels (for
example, prices of raw materials, number of staff members, sales
price).
- Sensitivity analysis is a statistical instrument based upon
seeing how inputs & parameters impact outputs. Usually, every
input is changed one at a time to observe how it impacts output.
But, this doesn’t account for interconnectedness among inputs; they
may not be autonomous variables.
Scenario analysis-
- Scenario analysis is designed to observe the consequences of an
act under various sets of factors. For instance, it reveals how an
investment ‘s NPV would vary under high inflation and low
inflation.
- Scenarios should be sufficiently feasible to give an accurate
picture of the results . A ‘good’ scenario for an investor
shouldn’t include winning the lottery as, although good, it is
neither probable / pragmatic for analyzing probable results.
- Several scenario analyses utilize three scenarios- base case,
worst & best case. But, the amount & conditions of the
scenarios in every analysis can differ.
Simulation is the imitation of the
functioning of an actual-world system. The behaviour of a system is
explored by producing an artificial history of the system thru the
utilization of random numbers. These numbers are utilized in the
context of a simulation framework, which is the logical,
mathematical and symbolic representation of the relations among the
matters of interest of the system. After the framework has been
validated, the impacts of fluctuations in the environment on the
system, or the impacts of changes in the system itself on the
system’s performance can be forecasted utilizing the simulation
model