9-Sensitivity%20Analysis

9-Sensitivity%20Analysis - Engineering Economics ECO 1192...

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Engineering Economics ECO 1192 Lecture 9: Sensitivity Analysis Claude Théoret University of Ottawa
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Eco 1192A -- Fall 2009 Lecture 9: Sensitivity Analysis 2 Recommended Reading Fraser et al.* chapter 11 Park chapter 10
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Eco 1192A -- Fall 2009 Lecture 9: Sensitivity Analysis 3 Lecture Outline 1. definitions 2. Sensitivity Graphs One variable Two variables 3. Breakeven Analysis Linear and nonlinear Contribution 4. Scenario Analysis
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Eco 1192A -- Fall 2009 Lecture 9: Sensitivity Analysis 4 Introduction Previous lectures assumed that future project cash flows were known with certainty timing and magnitude These cash flows are essentially “best estimates” and subject to error. Future events may be uncertain or risky Uncertain if we have no information about the probability that the event will happen (or not) Risky if we have some information about the probability of a future event’s occurrence This lecture examines project uncertainty. Dealing with project risk is examined later in the course.
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Eco 1192A -- Fall 2009 Lecture 9: Sensitivity Analysis 5 Major Step of Economic Evaluations: Perform Sensitivity and/or Risk Analyses Usually considerable uncertainty about both predicted impacts and their appropriate monetary valuation. Sensitivity analysis clarifies how these uncertainties affect the Cost-Benefit Analysis results. Causes analysts to focus on the most important variables or assumptions.
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Eco 1192A -- Fall 2009 Lecture 9: Sensitivity Analysis 6 Sensitivity Analysis Analysis of the effect on project summary measures (e.g., PW, FW or AEW) of changes to key project input variables (e.g., initial cost, annual revenues and costs, MARR) Methods include: Sensitivity graphs Breakeven analysis Scenario Analysis
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Eco 1192A -- Fall 2009 Lecture 9: Sensitivity Analysis 7 Why perform sensitivity analyses? 1. Make better decisions 2. Focus managerial attention on key variables 3. Identify variables that merit refinement
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Eco 1192A -- Fall 2009 Lecture 9: Sensitivity Analysis 8 Why Actual and Projected Cash Flows Differ? 1. Technological change (changes to production costs) 2. Changes in the size and number of competing firms 3. Introduction of new products (substitutes or complements) 4. Changes to key macroeconomic variables (e.g., inflation, unemployment, economic growth, exchange rate) 5. International events (globalization) 6. Three methods are commonly used by analysts to better understand the effect of uncertainty or errors in key project parameters (P; SV, …) on economic decisions each method is an example of sensitivity analysis.
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Eco 1192A -- Fall 2009 Lecture 9: Sensitivity Analysis 9 Sensitivity (spider) graphs or tables Provide a measure of the sensitivity of a project’s summary measure (e.g., PW , FW or AEW) to changes in key project parameters In its most basic form, only one of the key project parameters is changed at a time.
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This note was uploaded on 06/24/2010 for the course FIR 4440 taught by Professor Moore during the Spring '08 term at U. Memphis.

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9-Sensitivity%20Analysis - Engineering Economics ECO 1192...

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