In finance, no model survives contact with the real world unchanged. That's why sensitivity analysis plays such a critical role in valuation. It allows us to explore how changes in assumptions—like revenue growth or discount rate—impact the estimated value of a company.

A DCF model is only as reliable as the inputs it's built on. Growth rates, terminal values, and discount rates are all estimates, often based on forecasts and judgment. Sensitivity analysis takes these core variables and tests "what if?" scenarios. What if the discount rate is 1% higher? What if growth is slower than expected?

By adjusting one variable at a time—or sometimes two at once—we can observe how sensitive the enterprise value is to changes in assumptions. If a small change in WACC leads to a massive swing in valuation, the model is highly sensitive, and extra care must be taken in communicating results.

One of the most effective ways to visualize this is through a two-way data table, where rows might represent different WACC values and columns different terminal growth rates. Each cell in the table shows the resulting enterprise value, helping analysts and decision-makers quickly see the range of outcomes.

This isn't just an academic exercise—it's essential for communicating risk. It shows investors how dependent your valuation is on certain assumptions and helps build trust in your process by making uncertainties explicit.

Sensitivity analysis gives your model depth. It turns a single estimate into a spectrum—and that's exactly what good finance is about: understanding not just the answer, but the uncertainty around it.