Samuel Omofojoye

Importance of Sensitivity Analysis

Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model or system can be divided and allocated to different sources of uncertainty in its inputs. It can also referred to as “what-if” or simulation analysis. It is a way to redirect the outcome of a decision given a certain range of variables. By creating a given set of variables, an analyst can determine how changes in one variable affect the outcome.

Importance of Sensitivity Analysis

• It compels the decision maker to identify the variables which affect the cashflow forecasts.
• It helps investors in understanding the investment project in totality.
• It indicates the critical variables for which additional information may be obtained.
• It equally helps decision maker to consider actions, which may help in strengthening the “weak spots” in the business.
• It helps to expose inappropriate forecasts and thus guides the decision maker to concentrate on relevant variables.

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