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What are the advantages and disadvantages of sensitivity analysis of risk and uncertainty?
Wiki User
∙ 11y ago
ADVANTAGES AND DISADVANTAGES OF SENSITIVITY ANALYSIS
Advantages
1. It compels the decision maker to identify the variables which affect the
cashflow forecasts. This helps him in understanding the investment project
in totality.
2. It indicates the critical variables for which additional information may be
obtained. The decision maker can consider actions which may help in
strengthening the "weak spots" in the project.
3. It helps to expose inappropriate forecasts and thus guides the decision
maker to concentrate on relevant variables.
Disadvantages
1. It does not provide clear cut results. The terms optimistic and
pessimistic could mean different things to different people.
2. It fails to focus on the interrelationship between underlying variables.
For example sales volume may be related to price and cost but we analyse
each variable differently.
Wiki User
∙ 11y ago
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