Chapter 10 Dealing with Uncertainty

# Chapter 10 Dealing with Uncertainty - 1 Chapter 10 Dealing...

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Unformatted text preview: 1 Chapter 10: Dealing with Uncertainty No homework will be assigned for this chapter, however the material will be covered on the Final Exam. Problems 10, 12, and 19 are all good practice problems. (Solutions to these are posted under assignments.) 2 Introduction Remember the “Principles of Engineering Economy” in Chapter 1? #6 was: “Make Uncertainty Explicit” Sensitivity: • How “sensitive” the decision is to changes in particular factors • Robust - if the decision is not sensitive Risk and Uncertainty: • Decisions under risk are decisions in which we can assume probabilities for various outcomes. A decision under uncertainty is a decision in which probabilities for unknown futures cannot be estimated. Difference is somewhat arbitrary so terms will be treated interchangeably • Lack of precise knowledge (certainty) about future cash flows, events, outcomes, interactions between projects, etc. • Can be dealt with using probabilistic and non-probabilistic methods 3 Major Sources of Uncertainty Inaccuracy of the estimates used in the study Type of business involved in relation to the future health of the economy Type of physical plant and equipment involved Length of the assumed study period 4 Non-probabilistic Methods: Sensitivity analysis Breakeven analysis Sensitivity graph (Spiderplot) Optimistic-pessimistic estimation Risk-adjusted MARRS Reduction of the useful life 5 Breakeven Analysis Useful when the decision about whether to invest in a project or the decision between two or more alternatives is heavily dependent...
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## This note was uploaded on 04/17/2008 for the course IE 1036 taught by Professor Karenbursic during the Fall '06 term at Pittsburgh.

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Chapter 10 Dealing with Uncertainty - 1 Chapter 10 Dealing...

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