#dcfsensitivityanalysis

[efinancial-models62]

What is Sensitivity Analysis?

Sensitivity analysis is a very useful tool to analyze the impact of any changes in key assumptions on the key output of the model, such as the NPV and IRR. It is also known as the “what-if” analysis since you have to go through a series of what-ifs to run different simulations and determine the impact of each assumption. By running a variable through different scenarios or circumstances, you’ll be able to determine how sensitive the output is and also find out how to keep the inputs constant. In other words, sensitivity analysis is the task of calculating the uncertainty of a financial model while considering different sources of inputs.