Preparing a financial model involves a lot of assumptions and subjective decisions. In order to reduce the effects of this subjectivity as much as possible, you will need to adopt certain procedures, some of which we have already mentioned, and carry out certain tests designed to highlight the most volatile assumptions and pay direct attention to those inputs to which the model is most sensitive.
In this chapter, we will cover the following topics:
- Incorporating built-in tests and procedures
- Understanding sensitivity analysis
- Using direct and indirect methods
- Understanding scenario analysis
- Creating a simple Monte Carlo simulation model