chapter 5-inclass

# chapter 5-inclass - Module 5 Modeling Decisions Sensitivity...

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1 Module 5 Modeling Decisions Sensitivity Analysis

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2 Module 5 Sensitivity Analysis Topics -sensitivity analysis issues on decision modeling -identifying and structuring problems -dominance consideration in sensitivity analysis -sensitivity analysis and probabilities -tornado diagram and one-and two-way sensitivity graphs -sensitivity analysis performance using TopRank and Precision Tree program
3 Sensitivity Analysis Learning Objectives Effect of sensitivity analysis to the overall decision-modeling strategy Problem identification and structure Solving the right problem Error of the third kind

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4 Sensitivity Analysis Learning Objectives Dominance among alternative Use of tornado diagram One and two-way sensitivity analysis Probability assessment Use of computer program TopRank for sensitivity analysis
5 Sensitivity Analysis The purpose of sensitivity analysis is to refine the decision model what makes a difference in each decision Provide guidance for the development of a requisite decision model Eagle Airlines example

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6 “Eagle Airline” President of Eagle Airline would like to expand his operation with the company’s extra cash The mixture of charter flights and short schedule flights are profitable, but this is impossible without more aircraft A piper Seneca is for sale at a price of \$95,000 with five seats for passengers
7 “Eagle Airline” Operating cost: Approximately \$245 per hour Annual fixed costs including insurance is about \$20,000 The company need to borrow 40% of the money with 9.5% interest rate

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8 “Eagle Airline” Total revenue: The Eagle Airline could charge \$100 per person per hour on schedule flight Approximate 800 hours flight per year If Eagle Airline lease the airplane for year with the option to buy it would cost the company between \$2500 to \$4000 The Eagle Airline CEO could invest the extra cash in the money market and expect to earn about 8%
9 Problem Identification and Structure As we discussed in chapter one, sensitivity

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chapter 5-inclass - Module 5 Modeling Decisions Sensitivity...

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