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In Business / High School | 2025-07-08

Explain how GreenTech can apply sensitivity analysis and simulation to improve its investment decision.

Asked by PineappleDevil7330

Answer (1)

GreenTech can use sensitivity analysis and simulation to improve its investment decisions by assessing potential risks and uncertainties and evaluating the outcomes under different scenarios.

Sensitivity Analysis :

What : Sensitivity analysis involves changing one variable at a time to see how it affects the overall outcome. In the context of investments, GreenTech can use this to understand the impact of changes in key assumptions like revenue, costs, and interest rates.

How : This is done by developing a financial model and altering key inputs one at a time while keeping all other variables constant. For example, if GreenTech is considering an investment in new technology, it could vary the projected adoption rate of that technology to see how it affects profitability.

Why : It helps identify which variables have the most significant impact on the investment's performance, allowing GreenTech to focus its efforts on monitoring and managing those critical factors.



Simulation :

What : Simulation involves creating models that can handle various possible scenarios by using random variables. Monte Carlo simulation is a common technique where repeated random sampling is used to calculate and predict the probability of different outcomes.

How : By using Monte Carlo simulation, GreenTech can build a comprehensive model that includes all the variables. They then simulate thousands of different scenarios based on probabilities to predict a range of possible outcomes.

Why : This method provides a more robust view of potential risks and returns by showing not just a single outcome, but a range of possible results. It allows GreenTech to understand the likelihood of success and the potential risks involved in their investments, thus making more informed decisions.




In conclusion, by applying sensitivity analysis, GreenTech can identify key variables that significantly influence investment returns, while simulation can help visualize the range of possible outcomes under different scenarios, thus enhancing the decision-making process.

Answered by IsabellaRoseDavis | 2025-07-21

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