Sensitivity Analysis & Monte Carlo Simulation

Sensitivity Analysis & Monte Carlo Simulation

Sensitivity Analysis and Monte Carlo Simulations are methods you use in your financial feasibility study to see how a change in input affect the financial output measures. 

Monte Carlo Simulation is a more refined version of the Sensitivity Analysis.  While a sensitivity analysis is static the monte carlo simulation is dynamic and probabilistic.  You may or may not want to use these methods depending on the complexity of the project and the dynamics of the economic environment.

Inputs are items like:

Office space rental rates, hotel room rates, occupancy levels, table turnover, operating cost, construction cost, utility cost, inflation rate, interest rate, loan tenures, capitalization rate, time to stabilize occupancy levels, timing of land sales (for land development projects).

Output measures are :

IRR, NPV, Yield, ROE, Payback Period, EBITDA, Operating Cash Flows


The thing for you to know is :  What combination of input levels makes your project unfeasible?


Image : DavidRHScott

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