The Accounting Review Vol. 46 No. 4 1971
Analyzing and Reporting Sensitivity Data.
Abstract
This article examines the existing ways of presenting sensitivity data, presents an approach based on the isoquant concept and illustrates the application of this approach in the case of the present-value model for capital investment analysis. Sensitivity analysis has long been recognized as a useful tool in the decision-making process. Since the information input into decision models is subject to measurement and estimation error, it is important to understand and take account of the effect of such error. This need poses a challenge for accounting in its role of providing input data to management. It is desirable that not only point estimates be provided, but also ranges of possible error and the effects of such error on the decision variable. This raises the problem of the analysis and presentation of sensitivity data. The isoquant concept was recommended as a useful device for communicating sensitivity data to management. Isoquants may be used, for example to illustrate the conditions which must occur for a project to break even; the permissible errors in the estimates of the variables will still allow the present value to be estimated within certain limits; or the variation in present value given a particular range of error. One or more of these may be of assistance to management in dealing with the question of how much effect errors of estimation will have. The probability of each error need not be specified in advance. Rather, if one observes from the isoquants that a particular kind of error would have a large effect, only then need there be concern with the likelihood of that error being realized. Hence, the isoquants serve to identify those estimates which are critical in the decision process. In short, the addition of sensitivity data adds a useful dimension to planning data reported to management.
- DOI
- 10.2308/tar-4503917
- Volume
- 46
- Issue
- 4
- Pages
- 717-732
- Language
- en
- Sources
- openalex crossref