Chapter_10_Uncertainties

Chapter_10_Uncertain - Copyright Oxford University Press 2009 Chapter 10 Uncertainty in Future Events Copyright Oxford University Press 2009 •

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Unformatted text preview: Copyright Oxford University Press 2009 Chapter 10 Uncertainty in Future Events Copyright Oxford University Press 2009 • Single estimate versus a range of estimates • Probability distributions in economic analysis • Expected value and economic decision trees • Risk versus return • Simulation in economic analysis Chapter Outline Copyright Oxford University Press 2009 • Use a range of estimates to evaluate a project • Describe possible outcomes with probability distributions • Combine probability distributions for individual variables into joint probability distributions • Use expected values for economic decision-making • Use economic decision trees to describe and solve more complex problems • Measure and consider risk when making economic decisions • Understand how simulation can be used to evaluate economic decisions Learning Objectives Copyright Oxford University Press 2009 “Superfund”: • The federal law requires companies to clean up property sites that are contaminated by hazardous waste. • Hundreds of sites have been cleaned up at billions of dollars. • A large number of Superfund sites have been found to contain trichloroethylene (TCE), a widely used solvent. Vignette: They Only Thought They Were Done • Environment Protection Agency (EPA) discovered that TCE may be far more toxic than originally thought. • The cleanup techniques used in the past to remove TCE have made the problem worse. • EPA is studying whether previously cleaned sites should be reopened for additional remediation of TCE. Copyright Oxford University Press 2009 Vignette: They Only Thought They Were Done • How can a company quantify the risk of an event, such as discovery of TCE on its property? • What are some ways a company might estimate the cost of such an event, should it occur? • Prior to the mid-1970s, it was common and legal for manufacturers to landfill chemical and other potentially hazardous materials. When Superfund was adopted in 1980, it required companies to clean up the landfill. How can companies anticipate and prepare for future laws that might penalize activities which are legal today, but may become illegal in the future? Copyright Oxford University Press 2009 • Economic analysis requires evaluating the future consequences of an alternative. • Usually, a single value is selected to represent the best estimate that can be made. • Economic analysis was conducted assuming these estimates were correct. Estimates in Economic Analysis Copyright Oxford University Press 2009 Example 10-1 Impact of Estimates in Economic Analysis $292 F,3.5%,10) P ( 300 A,3.5%,10) P 250( 2000 NPW B = + +- = 319 $ ) 10 %, 5 . 3 , F P ( 100 ) 10 %, 5 . 3 , A P ( 150 1000 NPW A = + +- = A B Cost $1000 $2000 Net annual benefit $150 $250 Useful life, in years 10 10 End-of-useful-life salvage value $100 $400 ($300) 363 $ ) 10 %, 5 . 3 , F P ( 400 ) 10 %, 5 . 3 , A P ( 250 2000 NPW B = + +- = Copyright Oxford University Press 2009 Example 10-2 Use Breakeven in...
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This note was uploaded on 10/19/2011 for the course ENGINEERIN 110 taught by Professor King during the Spring '11 term at UCLA.

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Chapter_10_Uncertain - Copyright Oxford University Press 2009 Chapter 10 Uncertainty in Future Events Copyright Oxford University Press 2009 •

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