Sensitivity Analysis in Finance: Techniques and Tools, Lecture notes of Finance

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MSc Finance, MSc International Banking & Finance, MSc Investment & Finance, MSc International Accounting & Finance

Computing for Finance

and Financial Analysis

(Excel)

Lecture 5 - Week 6

Sensitivity Analysis “Investigation into how projected performance varies along with changes in the key assumptions on which the projections are based.” - www.investorwords.com “What happens if...?” i. Change values directly ii. Goal Seek iii. Scenario Manager iv. Solver

Goal Seek Set s a cell containing a formula to a target value by changing a cell referred to by the formula.

Goal Seek Example: IRR Internal Rate of Return Can be used with NPV as another method of testing whether a project is worth embarking on. IRR = the discount rate which produces an NPV of 0.

Scenario Manager Allows a cell to be changed to several values Results are summarised in a table Example: Changing scrap values

Solver Basically the same as Goal Seek but more sophisticated Allows target to be set to < or > a value as well as = Can change more than one cell and constrain those changes Produces a summary report

Logical Functions =AND( test1, test2, test3... test30 ) Returns TRUE if all the tests are true. =OR( test1, test2, test3... test30 ) Returns TRUE if any of the tests are true. Nesting: =IF(AND( test1,test2,test3 ), trueres lt ,falseres lt )

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