A study on sensitivity analysis of scenarios

Kumar, K. Senthil, and Desti, Kannaiah (2014) A study on sensitivity analysis of scenarios. International Journal of Business and Administration Research Review, 2 (4). 18. pp. 153-159.

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Presently, organizations are using different appraisal methods to financially assess the attractiveness of investment projects. All of these methods possess an inherent problem of uncertainty, because the assessments are based on future estimated values. Such future values are based on current available data, and most of them cannot be predicted with statistical confidence. Since these future values cannot be predicted within a comfort level of certainty, a financial appraisal assessment is usually supplemented with sensitivity and scenarios analysis. Sensitivity analysis [of variables] involves 'changing the value of a variable in order to test its impact on the final result' (Savvides 1994). This method is particularly useful in discovering which key variables are carrying the most risks in the project. However, some drawbacks associated with this method are that it deals with changes in isolation, and tends to ignore interaction between variables. On the other hand, scenario analysis is capable of 'changing a number of variables simultaneously to provide a particular 'state of the world', or scenario, for managers to consider' (Atrill 2006). Although scenario analysis can overcome the two drawbacks of sensitivity analysis, the former is not as efficient, like the latter, in identifying highly sensitive scenarios.

Item ID: 34196
Item Type: Article (Scholarly Work)
ISSN: 2347-856X
Date Deposited: 23 Jul 2014 05:45
FoR Codes: 15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1502 Banking, Finance and Investment > 150201 Finance @ 50%
14 ECONOMICS > 1499 Other Economics > 149901 Comparative Economic Systems @ 50%
SEO Codes: 91 ECONOMIC FRAMEWORK > 9101 Macroeconomics > 910109 Savings and Investments @ 50%
90 COMMERCIAL SERVICES AND TOURISM > 9001 Financial Services > 900101 Finance Services @ 50%
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