Cash flow sensitivity analysis is an analysis that finds the subtleness of an output to any alteration brought in an input while keeping other input variables constant. In the world of finance, it refers to an analysis of how each of the variables of the input matter in a capital budgeting decision. Cash flow sensitivity also plays an immense role while making important decisions like discount rates, cash flows growth rate and changes in tax rate.
Cash flow sensitivity analysis template presents as a model of how dependent the value of the output is for each input variable. The changes brought in the input affect the net current value. It also helps company executives an idea of assessing risk factors for any input variable to go hostile.
Cash flow sensitivity analysis is conducted as:
- Finding out the net present value at the value of the input for which we plan to measure the sensitivity by keeping all other inputs constant.
- Finding the value of output at some new value of the input, again, while keeping other inputs constant.
- Finding the percentage change in the output along with the percentage change in the input.
- Sensitivity is calculated by dividing the percentage change in output by the percentage change in input.
The Template can be used by company executives to draw out an analysis of the company’s cash flow. By preparing a cash flow sensitivity analysis, the expected cash flow forecast scan be determined by finding out the percentages of the positive and the negative cash flows.
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