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Sensitivity analysis

Sensitivity Analysis

Sensitivity analysis is a financial modeling tool used to assess how changes in key variables affect the outcome of a financial decision or projection. By altering inputs such as costs, interest rates, or sales volume, sensitivity analysis helps businesses and investors evaluate the potential impact of various scenarios and market conditions. This analysis is often used in budgeting, forecasting, and risk management to prepare for different financial outcomes.

Example

A company might use sensitivity analysis to predict how a 5% increase in raw material costs would impact its overall profit margins.

Key points

• Assesses how changes in variables affect financial outcomes.

• Helps businesses and investors evaluate different market scenarios.

• Useful for risk management and financial forecasting.

Quick Answers to Curious Questions

How does sensitivity analysis help in financial forecasting?

It shows how varying inputs affect outcomes, improving forecasting accuracy.

What are some common variables analyzed in sensitivity analysis?

Common variables include interest rates, sales figures, and operating costs.

How does sensitivity analysis aid in managing business risks?

It helps identify which variables pose the greatest risks, enabling better planning and response.

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