p_eval4_l21_ris

p_eval4_l21_ris - 1.011 Project Evaluation Dealing with...

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1.011 Project Evaluation Carl D. Martland 1. Definitions 2. Techniques 3. Examples
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"Make Uncertainty Explicit" (Principle 6, Sullivan et al, Engineering Economy, p. 7) Understand the uncertainties and the risks Seek protection against the most serious risk Use discount rates that are suitable for the risks evident for a particular project Higher discount rates for riskier projects
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Uncertainty We cannot predict the future, and we may not even have good estimates of probabilities of possible outcomes Variations about the norm Changes in trends "New Facts" Projects create new demands - and we can't always refer to past experience
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Risks Risks refer to the possibility that something will go wrong. For example: Construction risks(unable to construct on time and within budget because of technical or organizational problems) Competitive risks (loss of market to better,earlier, or larger projects similar to or substituting for your project) Financial risks (changes in interest rates ,exchange rates, credit limits that affect our ability to raise sufficient funds for project; changes in cash flows that affect ability to mortgage payment) Political risks (changes in government or in regulations that limit our ability to complete, open, or receive payment for our project)
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Methods • Methods driven by the analysis – Sensitivity Analysis – Probabilistic Analysis – Monte Carlo Simulation • Methods driven by the structure – Key drivers – Scenarios
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Sensitivity Analysis Systematic analysis of the effects of changes in one or more variable on our results and our choice of an alternative Cost factors: unit costs, discount rates, process speed Benefit factors: prices, demand, external impacts Key choices What is our base case? Best estimate of all factors
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This note was uploaded on 11/29/2011 for the course CIVIL 1.00 taught by Professor Georgekocur during the Spring '05 term at MIT.

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p_eval4_l21_ris - 1.011 Project Evaluation Dealing with...

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