California Polytechnic State University – San Luis Obispo
Industrial and Manufacturing Engineering Department
IME 314 – Engineering Economic Analysis
Determining Sensitivity to Parameter Variation
is used to represent any variable or factor for an estimate or stated
value is necessary.
Example parameters are: first cost, salvage cost, annual operating
cost, estimated life, production rates, materials costs, etc. Estimates such as loan
interest rates and inflation rates are also parameters of the analysis.
Sensitivity analysis uses estimates of a parameter’s future value to assist decision
Since these future estimates are always estimates and may be flawed, it is
always a good idea to see how each of the important parameters can affect the decision
making based on their variation.
Or how sensitive is the final decision to the
approximate values given to these estimated parameters.
Sensitivity analysis determines how a measure of worth – PW, AW, ROR or B/C – and
the selected alternative will be altered if a particular parameter varies over a stated
range of values.
For example, variation in a parameter such as MARR would not alter
the decision to select an alternative when all compared alternatives return considerably
more than the MARR; thus the decision is relatively insensitive to variations in MARR.
However, variation in the
value may indicate that selection from the same alternatives
is very sensitive to estimated life.
Usually the variations in life, annual costs, and revenues result from variations in selling
price, operation at different levels of capacity, inflation, etc.
For example, if an operating
level of 90% of airline seating capacity for a domestic route is compared with 50% for a
proposed international route, the operating cost and revenue per passenger mile will
increase, but anticipated aircraft life will probably decrease only slightly.
important parameters are studied to learn how the uncertainty of estimates affects the
Sensitivity analysis usually concentrates on the variation expected in estimates on
present worth, annual operating costs, salvage value, estimate life, unit costs, unit
revenues and similar parameters.
These parameters are often the result of design
questions and their answers.
Plotting the sensitivity of present worth, annual worth or ROR versus the parameters