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Using Excel for Sensitivity Analysis:

Making Better Informed Decisions

under Uncertainty

Dr. Nick Lebredo

Professor, CMA CPA CFE

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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)

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What Is Sensitivity Analysis?

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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.

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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.

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Example Applications

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- Forecasting sales, profit, or cash flows

- Constructing an operating budget

- Capital budgeting

- Financial planning

- Predicting any type of performance

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Why Learn Sensitivity Analysis Techniques?

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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.

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“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?

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How Can We Do Sensitivity Analysis?

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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.

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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

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Sensitivity Analysis with Excel: Solver

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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…

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Sensitivity Analysis with Excel: Solver

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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…

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Sensitivity Analysis with Excel: Data Tables

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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…

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Sensitivity Analysis with Excel: Scenario Manager

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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…

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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)

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Questions?

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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