#IMA16ACE
Using Excel for Sensitivity Analysis:
Making Better Informed Decisions
under Uncertainty
Dr. Nick Lebredo
Professor, CMA CPA CFE
#IMA16ACE
Learning objectives
Explain the nature of sensitivity analysis
Identify when and how sensitivity analysis can improve decision making
Describe four different Excel tools: (Goal Seek, Solver, Data Tables, and Scenario Manager)
2
#IMA16ACE
What Is Sensitivity Analysis?
3
Sensitivity analysis is a modeling technique used to
evaluate how the outputs or outcome of a model may
change when the model’s input values are changed.
The term “sensitivity analysis” refers to evaluating how
“sensitive” (i.e., how responsive to change) the results of a
particular model may be to changing the assumptions
that are used to develop the model.
#IMA16ACE
4
When Should Sensitivity Analysis Be Done?
Sensitivity analysis can be helpful whenever we are
constructing a model that intends to predict a future
outcome.
Predictive models, by definition, have many variables
and assumptions. These variables and assumptions
should be explicitly acknowledged and generally have
a range of possible values that can significantly affect
the reliability of the model.
#IMA16ACE
Example Applications
5
- Forecasting sales, profit, or cash flows
- Constructing an operating budget
- Capital budgeting
- Financial planning
- Predicting any type of performance
#IMA16ACE
Why Learn Sensitivity Analysis Techniques?
6
Decision-makers want (and need) to appreciate the
risks associated with making a decision.
We are placing our professional credibility on the line
when we make predictions and recommendations!
The future is uncertain! The future can humble anyone
but particularly those that are most certain about it.
#IMA16ACE
7
“There are two kinds of forecasters. Those that don’t
know and those that don’t know they don’t know.”
– John Kenneth Galbraith (Economist, Presidential
Advisor)
“Predictions are risky especially when they involve the
future!” – Yogi Berra (Hall of Fame Baseball Player)
Arrogance is a close cousin of ignorance. Always
recognize the limitations and risks of any analysis!
Why Learn Sensitivity Analysis Techniques?
#IMA16ACE
How Can We Do Sensitivity Analysis?
8
The first step is to conceptually construct a thoughtful
predictive model that explicitly identifies each input and
output variable.
The second step is to consider the reliability of the
predictive model. Can the predictive model be back-tested
with actual historical data? Can the predictive reliability of
the model be evaluated using statistical methods?
The third step is to consider how changes in each input
variable can potentially affect the results of the model. This
step is what we call sensitivity analysis and can be
facilitated by Excel.
#IMA16ACE
9
Goal Seek: Simplest of all “what if
analysis” Excel tools but it works
backwards. It answers the question:
What would a single input variable
need to be to obtain a desired result?
Let’s Practice…
Sensitivity Analysis with Excel: Goal Seek
#IMA16ACE
Sensitivity Analysis with Excel: Solver
10
Solver: More versatile than Goal Seek
since it can find maximum, minimum, or
specified output values for a model given
the adjustable input values. Also allows
the user to specify variable constraints.
Let’s Practice…
#IMA16ACE
Sensitivity Analysis with Excel: Solver
11
Solver: More versatile than Goal Seek
since it can find maximum, minimum, or
specified output values for a model given
the adjustable input values. Also allows
the user to specify variable constraints.
Let’s Practice…
#IMA16ACE
Sensitivity Analysis with Excel: Data Tables
12
Data Tables: Does not require specifying
a desired result. Good to use when you
want to more completely show the model
results (i.e., display a data table of inputs
and outputs) of changing either one or
two input variables for a given model.
Let’s Practice…
#IMA16ACE
Sensitivity Analysis with Excel: Scenario Manager
13
Scenario Manager: More versatile than
Goal Seek and Solver since it does not
require specifying a result. More
powerful than Data Tables since it can
handle more changing input values.
Multiple Scenario models can also be
merged, compared, and saved.
Let’s Practice…
#IMA16ACE
Where Do I Go From Here?
There are numerous resources to learn more about these techniques:
What-if analysis articles (from Microsoft Office Support)
Excel 2016 What If Analysis (from gcflearnfree.org)
Excel 2013 What If Analysis (from gcflearnfree.org)
Sensitivity Analysis Videos (from YouTube)
Beginning Excel What-If Data Analysis Tools: Getting Started with Goal
Seek, Data Tables, Scenarios, and Solver by Paul Cornell (2005)
#IMA16ACE
Questions?
#IMA16ACE
Using Excel for Sensitivity Analysis:
Making Better Informed Decisions
under Uncertainty
Dr. Nick Lebredo
Professor, CMA CPA CFE
10 Paragon Drive, Suite 1
Montvale, New Jersey
07645-1760
U.S.A.
(800) 638-4427
+1 (201) 573-9000
www.imanet.org
10 Paragon Drive, Suite 1
Montvale, New Jersey
07645-1760
U.S.A.
(800) 638-4427
+1 (201) 573-9000
www.imanet.org