Financial modeling aims to inspect the viability of a project. But a financial model completely depends on the assumptions from which it is established. In real life, things never happen according to initial plans. That’s why we highly recommend to continuously stress test projects by doing sensitivity analysis based on their financial model.
Sensitivity analysis as indicator for the risk level of a project
Sensitivity analysis permit to calculate the impact of variations of used assumptions. By doing sensitivity analysis, you can, for example, check what will happen to the return of your project if you’re applying a higher p-value or assuming a higher purchase price. Verifying different scenarios enables you to identify weaknesses and crucial aspects of your project and gives you the possibility to be prepared for worst case scenarios.
Simulations should be runned continuously
We at greenmatch run continuous sensitivity analysis for projects we support. In our software, we have implemented this functionality in a specific simulations tab. There, you can either run simulations with 1 changing parameter or even 2 changing parameters, permitting you, for example, to identify the impact of a differing p-value combined with a different lifetime or asset purchase price assumptions.
We also provide a Monte Carlo simulation, which allows you to simulate different production profiles and calculate resulting return distributions.
Try it yourself and register now for a trial account!
In this video we will show you how to run simulations with greenmatch
