Applied Analytics | Static Tornado

Tornado Analysis (Figure 4.1 shows the DCF module’s default example’s Tornado Analysis result) is a static sensitivity analysis of the selected model’s output to each input assumption, performed one at a time, and ranked from most impactful to the least. Start the analysis by first choosing the output variable to test from the drop-down list.

You can change the default sensitivity settings of each input assumption to test and decide how many input assumption variables to chart (large models with many inputs may generate unsightly and less useful charts, whereas showing just the top variables reveals more information through a more elegant chart). You can also choose to run the input assumptions as unique inputs, group them as a line item (all individual inputs on a single line item are assumed to be one variable), or run as variable groups (e.g., all line items under Revenue will be assumed to be a single variable). Remember to click Compute to update the analysis if you make any changes to any of the settings. The sensitivity results are also shown as a table grid at the bottom of the screen (e.g., the initial base value of the chosen output variable, the input assumption changes, and the resulting output variable’s sensitivity results). As usual, you can Copy Chart or Copy Grid results into the Windows clipboard for pasting into another software application.

TIPS on Interpreting Tornado Analysis Results
  • Each horizontal bar indicates a unique input assumption that constitutes a precedent to the selected output variable.
  • The x-axis represents the values of the selected output variable. The wider the bar chart, the greater the impact/swing the input assumption has on the output.
  • A green bar on the right indicates that the input assumption has a positive effect on the selected output (conversely, a red bar indicates a negative effect).
  • As another example, in Figure 4.1, we see the following:
    • The output tested is Project 1’s NPV with Terminal Value.
    • Each of the precedent or input assumptions that directly affects the NPV with Terminal Value is tested ±10%; the top 10 variables are shown on the chart, with a 2 decimal precision setting, and each unique input is tested individually.
    • The results indicate that the Discount Rate has the highest impact, naturally, with the highest swing (widest horizontal bar), with a red bar on the right, indicating that the lower the discount rate (Input Downside in the grid and on the red right chart: 9.00%), the higher the NPV (Output Downside in the grid and on the red right bar chart’s x-axis: 867,389). Conversely, the higher the discount rate (Input Upside in the grid and on the green left bar chart: 11.00%), the lower the NPV (Output Upside in the grid and on the red right bar chart’s x-axis: 615,707).
  • The Excel icon will create a live Excel-based Tornado chart.
  • Multiple chart icons are available to manipulate the look and feel of the chart (e.g., the ABC… icon will change the vertical axis labels between the shortened and detailed description).
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