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Practical sensitivity analysis

Author

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  • Ignacio Velez-Pareja

Abstract

In this teaching note we show how to use sensitivity analysis to consider uncertainty in the valuation of cash flows. We illustrate in a very simple way the use of the traditional identical percent change in the variables and an approximate approach that considers the probability of occurrence of the changes using the standard deviation as the change instead of the relative change expressed as a percent. Two variables and scenario analysis is shown to illustrate the sensitivity of multiple variables.

Suggested Citation

  • Ignacio Velez-Pareja, 2007. "Practical sensitivity analysis," Proyecciones Financieras y Valoración 4325, Master Consultores.
    • Handle: RePEc:col:000463:004325
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    File URL: http://ssrn.com/abstract=881055
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    Cited by:

    1. Fátima Calderón-Vargas & David Asmat-Campos & Anselmo Carretero-Gómez, 2019. "Sustainable Tourism and Renewable Energy: Binomial for Local Development in Cocachimba, Amazonas, Peru," Sustainability, MDPI, vol. 11(18), pages 1-21, September.

    More about this item

    Keywords

    Uncertainty; sensitivity analysis; probabilistic sensitivity analysis; cash flow valuation.;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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