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7. Sensitivity analysis

7. Sensitivity analysis. Impact analysis, worst case scenarios, risk analysis, Monte Carlo simulation techniques. We have built a great model, but is it of any use?. Overview. 7.1 Impact Analysis 7.2 Scenario Analysis 7.3 Monte Carlo Simulation. Impact Analysis on IRR.

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7. Sensitivity analysis

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  1. 7. Sensitivity analysis Impact analysis, worst case scenarios, risk analysis, Monte Carlo simulation techniques Sensitivity Analysis

  2. We have built a great model, but is it of any use? Sensitivity Analysis

  3. Overview • 7.1 Impact Analysis • 7.2 Scenario Analysis • 7.3 Monte Carlo Simulation Sensitivity Analysis

  4. Impact Analysis on IRR • One uncertain item at the time, say Price, Sales and Equipment • Insert impact factor 100% and multiply uncertain item with that • Use Excel Data Table for a range of factor values, say from 50% to 150% • Do same for other uncertain items • Use Excel Chart Sensitivity Analysis

  5. Data Tables for Impact Analysis on IRR of Equity Sensitivity Analysis

  6. Sensitivity Analysis

  7. Try to see the big picture! Sensitivity Analysis

  8. Scenario Analysis • Many uncertain items changed at the time • Use Excel Scenario Manager • Select Changing Cells • Determine values for each scenario • Determine name of scenarios, for example Pessimistic, Optimistic, .., • Select Result Cells Sensitivity Analysis

  9. Scenario Analysis Sensitivity Analysis

  10. Pessimistic scenarios are more common than optimistic! Sensitivity Analysis

  11. Monte Carlo Simulation • Random number generators • Probability distributions • Simulation tools (@Risk or Crystal Ball) Sensitivity Analysis

  12. Three Point Estimate: a, m, b • For uncertain items, say cost • Assume a Beta probability distribution (or Triangular) • Three points estimated: • optimistic a • most likely m • pessimistic b Sensitivity Analysis

  13. Triangular Distribution Sensitivity Analysis

  14. Simulation with Random Number Generation • Simulation Tools, add-ins to Excel • @Risk • Crystal Ball • Generate histogram for a result item, say IRR of Equity Sensitivity Analysis

  15. Histogram of IRR of Equity Sensitivity Analysis

  16. Beginning to see the light? Sensitivity Analysis

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