Apr 05, 2017 2:05 AM
Replying to Nasrullah Mohammed
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Aejaz - Sensitivity analysis, also referred to as what-if or simulation analysis, is a way to predict the outcome of a decision given a certain range of variables. By creating a given set of variables, the analyst can determine how changes in one variable impact the outcome.
Sensitivity Analysis Example:
Assume Sue, a sales manager, wants to understand the impact of customer traffic on total sales. She determines that sales are a function of price and transaction volume. The price of a widget is $1,000 and Sue sold 100 last year for total sales of $100,000. Sue also determines that a 10% increase in customer traffic increases transaction volume by 5%, which allows her to build a financial model and sensitivity analysis around this equation based on what-if statements. It can tell her what happens to sales if customer traffic increases by 10%, 50% or 100%. Based on 100 transactions today, a 10%, 50% or 100% increase in customer traffic equates to an increase in transactions by 5, 25 or 50. The sensitivity analysis demonstrates that sales are highly sensitive to changes in customer traffic. Cheers!
