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Part: III Investment Decisions > Creating a Sensitivity Analysis for a Business...

Chapter 13. Creating a Sensitivity Analysis for a Business Case

A business case is a snapshot of a set of assumptions surrounding a business activity that your firm is considering. Some of these assumptions can be made with relatively high confidence; others are little more than educated guesses. A well-prepared business case recognizes that at least some of its inputs are bound to be inaccurate.

The business case should document the logic behind the numbers, and should also test the sensitivity of its results to variations in its input assumptions. Suppose that a business case assumes, among other things, that a company can obtain a loan at 9%. If it gets that loan, according to the business case, the company can expect profits to increase by 12%. The business case should also report the expected profits for other interest rate assumptions (8% and 10%, for example). By varying the input assumption (interest rate), decision makers can determine how sensitive certain measures (profits) are to changes in assumptions.


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