What are some examples of ways that sensitivity analysis can be used?

Modified on Mon, 18 Jun 2018 at 04:32 PM

Sensitivity analysis is an analysis method that is used to identify how much variations in the input values for a given variable will impact the results for a mathematical model. Sensitivity analysis can be applied in a number of different disciplines, including business analysis, investing, environmental studies, engineering, physics and chemistry.

Sensitivity analysis is concerned with the uncertainty inherent in mathematical models where the values for the inputs used in the model can vary. It is the companion analytical tool to uncertainty analysis, and the two are often used together. All models composed or studies done to draw conclusions or inferences for policy decisions are based on assumptions regarding the validity of the inputs used in calculations. For example, in equity valuation, the return on assets (ROA) ratio assumes that a valid, accurate calculation of a company's assets can be arrived at, and that it is reasonable to analyze profits, or returns, in relation to assets as a means of evaluating a company for investment purposes.

Source : Investopedia

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