The technique used to determine how independent variable values will impact a particular dependent variable under a given set of assumptions is defined as sensitive analysis. It’s usage will depend on one or more input variables within the specific boundaries, such as the effect that changes in interest rates will have on a bond’s price.

1. Sensitivity Analysis: Definition, Uses & Importance
What is SensitivityAnalysis?
Financial riskmodelingtakessensitivityanalysistothe nextlevelandhelpsinassessing the probability
and potential impactof unfavorable outcomes.Basedonthe assessments,variousdecisionswith
respectto managing,hedgingortransferringrisksare taken.
Sensitivityanalysisisone of the toolsthathelpdecisionmakerswithmore thana solutiontoa problem.
It providesanappropriate insightintothe problemsassociatedwiththe model underreference. Finally,
the decisionmakergetsadecentideaabouthow sensitive the optimumsolutionis chosenbyhimtoany
changesinthe inputvaluesof one ormore parameters.
Have you everbeencaughtina situationregardingdatasensitivityanalysisinFinancial Modeling?If you
have faceda problembefore,findyouranswerrighthere!
Measurementofsensitivityanalysis
Beloware mentionedthe stepsusedtoconductsensitivityanalysis:
 Firstly, the base case outputisdefined;saythe NPV ata base case inputvalue (V1) forwhichthe
sensitivityistobe measured.All the otherinputsof the model are keptconstant.
 Thenthe value of the output at a new value of the input(V2) while keepingotherinputs
constantis calculated.
 Findthe percentage change inthe outputandthe percentage change inthe input.
 The sensitivityiscalculatedbydividingthe percentage change inoutputbythe percentage
change in input.
Thisprocessof testingsensitivityforanotherinput(saycashflowsgrowthrate) whilekeepingthe restof
inputsconstantisrepeatedtill the sensitivityfigure foreachof the inputsisobtained.The conclusion
wouldbe that the higherthe sensitivityfigure,the more sensitivethe outputistoanychange inthat
inputandvice versa.
For SensitivityAnalysisfollowthe followingsteps
FirstLINKthe outputyouwant to checksensitivityof?(IN FMCGcase linkthe share Price orEV)
Nextdecide the variableyouwanttocheck the sensitivityof (e.g. WACC;TerminalGrowthrate;tax rate
etc.)
Let’ssay we selectedWACCand Terminal Growthwhichoriginallynthe model is10.7% and 5%. Now
take the range for twovariable whichwill be 8.7;9.7; 10.7;11.7 and 12.7% for WACC and let’ssay3; 4; 5;
6; 7% for T. Growth.place these numbersonthe cell nexttoyourlinkedcell instepone above. So, if you
have linkedEV inthe cell G30 Wickwill come inthe cell fromH30 - L30 and T Growth will come incell
G31 to G35

2. Nowselectthe cell fromG30 to L35 and go to data tab - "What if Analysis" - "Datatable"
Nowinthe windowwhichpopsupinthe "row input"selectthe cell where youhave originallycalculated
your WACCand inColumn selectcell where youhave originallycalculatedTGrowthRate andpress
enter
Usesof SensitivityAnalysis
 The keyapplicationof sensitivityanalysisistoindicate the sensitivityof simulationto
uncertaintiesinthe inputvaluesof the model.
 Theyhelpindecisionmaking
 Sensitivityanalysisisamethodforpredictingthe outcome of adecisionif asituationturnsout
to be differentcomparedtothe keypredictions.
 It helpsinassessingthe riskinessof astrategy.
 Helpsinidentifyinghowdependentthe outputisona inputvalue.Analysesif the dependencyin
turn helpsinassessingthe riskassociated.
 Helpsintakinginformedandappropriate decisions
 Aidssearchingforerrorsin the model
Conclusion
Sensitivityanalysisisone of the toolsthathelpdecisionmakerswithmore thana solutiontoa problem.
It providesanappropriate insightintothe problemsassociatedwiththe model underreference. Finally,
the decisionmakergetsadecentideaabouthow sensitive the optimumsolutionis chosenbyhimtoany
changesinthe inputvaluesof one ormore parameters.
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sensitivity-analysis