Q29RQ - Horngren'S Financial And Managerial Accounting

Question

How can spreadsheet software, such as Excel, help with sensitivity analysis?

Step-by-Step Solution

Answer

All investing is probabilistic because it is impossible to know with certainty what will occur in 5, 10, or 15 years, but it is possible to provide a realistic range of prospective outcomes, so that investors can change their assumptions in a model and examine the output under various alternative scenarios by using sensitivity analysis in Excel or other spreadsheet program.

Step 1: Definition

Sensitivity analysis is the examination of several causes of uncertainty in model input might be allocated to the uncertainty in the model's output, whether it is numerical or not.

Step 2: Advantages

Sensitivity analysis provides decision-makers with various outcomes to aid in better commercial decision-making. Predictions are more accurate because they thoroughly analyze the factors that influence them.