Chap_10

# Chap_10 - IE3125Engineering EconomicAnalysis Chapter10...

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IE 3125  Engineering  Economic Analysis Chapter 10 Risk Analysis

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What Is Risk Analysis? Recognition that many economic  parameters are uncertain Expected value approach Probability approach
Expected value Finite series of possible outcomes Probability of each outcome Estimates Must total 1.00 = = = = N n N n n n P where n P Out EV 1 1 1 ) ( ) (

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Example Powerball winnings (\$1.00 ticket) \$10,000,000 (1/120,000,000) \$100,000 (1/3,000,000) \$5,000 (1/100,000) \$100 (1/12,250) \$7 (1/190) \$4 (1/124) \$3 (1/70) 287 . 0 ) 972 (. 0 ) 0143 (. 3 ) 00807 (. 4 ) 00526 (. 7 ) 0000816 (. 100 ) 00001 (. 5000 ) 000000333 (. 100000 ) 3 0000000083 (. 10000000 = + + + + + + + = EV
Probability Approach Assign probability distributions to  parameters Cash flows (or components) MARR Compute the probability distribution of  the results PW, AW, FW, IRR, ERR, B/CR

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## Chap_10 - IE3125Engineering EconomicAnalysis Chapter10...

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