Practical Sensitivity Analysis
20 Pages Posted: 7 Feb 2006
Date Written: February 3, 2006
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.
Keywords: Uncertainty, sensitivity analysis, probabilistic sensitivity analysis, cash flow valuation.
JEL Classification: G12, G31
Suggested Citation: Suggested Citation