week4da - Spring 2010 DecisionAnalysis MS405 Sensitivity...

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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 Week 4 1 Decision Analysis   MS 405    Sensitivity Analysis Kemal Kılıç Faculty of Engineering and Natural Sciences
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 Sensitivity Analysis Sensitivity analysis is central to the structuring and solving of decision models when using decision-analysis techniques. Relates to the overall decision modeling strategy and model refinement. Sensitivity analysis techniques One-way Sensitivity Analysis Spider and Tornado Diagrams Two-way Sensitivity Analysis Sensitivity to Probabilities Two-way Sensitivity Analysis for Three Alternatives Week 4 2
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 1. To analyze what really matters  in the decision problem 2. To construct a requisite decision model Examples of Sensitivity Analysis Techniques in DA 1. Determine if deterministic or stochastic dominance is  present 2. Identify the important variables through Tornado  Diagrams 3. Identify interactions among important variables 4. Identify the importance of probability assessments Purpose of Sensitivity Analysis Week 4 3
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 Dick Carothers wants to expand his operation. Mid West has to offer: 1. An airplane (seneca) @ price $95000 (He can probably buy the plane for $85K-$90K) 2. An option to buy the airplane a year later (Cost of the option $2.5k – $4k) Currently: 1. Eagle Airlines (=Dick Carothers) owns 3 plains 2. 50% of flights are chartered flights and 50% are scheduled Week 4 4 Eagle Airlines -Case Study (I)
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 Cost Data for Mid West Plane (Seneca): 1. New Engines, FAA Maintained 2. Contains all equipment that Eagle Airlines needs 3. 5 seats 4. Operation Cost: about $245 per hour 5. Fixed Cost: about $20k (=Yearly Insurance) + Finance Charges Finance Charges: Borrow 40% of the price at 2% above the prime rate (=9.5%, but subject to change). Revenue Data: 1. Chartered Flights: $300 - $350 per hour 2. Scheduled Flights: about $100 per person per hours, planes are on average 50% full 3. Expected number of hours flown with new plane 800-1000 per year. Eagle Airlines -Case Study (II) Week 4 5
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Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 VARIABLES IN CONTROL: 1. The price you charge 2. The amount financed VARIABLES NOT IN CONTROL: 1. Insurance Cost 2. Operation Cost 3. Demand Carothers could always invest his cash $52500 @ 8% yearly interest rate, yielding an annual interest in the first year of: $4200 WHAT SHOULD DICK CAROTHERS DO? Eagle Airlines -Case Study (III)
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week4da - Spring 2010 DecisionAnalysis MS405 Sensitivity...

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