Let's say, I'm running a guest house with 6 bedrooms. I've
invested in the decor of the guest house by taking a loan from a bank.
I've calculated the equal monthly instalments that I've to pay the bank
and added them to my variable costs. Then I've calculated the cost of
electricity, maintenance, salaries, advertisements, etc which
contribute to my monthly or yearly variable costs. I also know what I
can reasonably charge my customers. From these parameters I can easily
calculate my expected revenues and profits before tax and after tax.
Then I make some estimates about the growth of the rents and variable
costs. From this data I can create different scenarios using the Solver
function in Excel and perform a sensitivity analysis on my profits
based on the rent, growth of rent per year, escalation of variable
costs, etc.. Let's see how this is done using a training video. You may
need to click on the 'play' button to start the video.
Earlier we had shown how to perform a sensitivity analysis using data
tables.