Module23 - Making the Decision with Multiple Projects...

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Making the Decision with Multiple Projects Multiple Alternatives and Multi-attribute Analysis Part I
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Key Concepts Last Module: Examined options in time with investment analyses This Module: Examine how to choose between multiple projects and multiple attributes We gather a lot of information about our projects. How do we make a choice?
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Recall: Methods to Evaluate Risk Deterministic Methods Payback Period Project Balance Sensitivity Analysis Breakeven Analysis Scenario Analysis Probabilistic Methods Scenario Analysis Simulation Analysis
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Sensitivity Analysis Can still examine sensitivity for each parameter for each individual project. Multiple project analysis examines changes with alternatives among all similar parameters. With two alternatives -- often easier to examine sensitivity of differences. With multiple alternatives, may have to examine individually (although on same graph).
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Example Royal Dutch Shell and Canadian oil company Nexen Inc said they discovered oil at the Appomattox prospect in the Mississippi Canyon, which is in the relatively underexplored eastern part of the Gulf of Mexico. It is believed to hold 100 million barrels of oil. Chazan, G. “Shell Unveils Oil Discovery in Gulf of Mexico,” Wall Street Journal , March 20, 2010.
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Sensitivity Analysis Assume that two investment options are being considered (mutually exclusive) to exploit the field: Project A: $275M investment; annual costs of $30M per year. Expected barrels (per year): 0, 0, 1M, 2M, 3M… Project B: $380M investment; annual costs of $15M per year Expected barrels (per year): 0, 0, 0, 0, 1M, 2M, 3M, 4M, 5M… Profit is $30/barrel of oil and MARR of 15%
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Baseline Analysis B preferred to A using total investment analysis.
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Incremental Analysis B preferred to A with incremental analysis by $70.1 million.
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Effect of MARR An error of 33% in the MARR leads to a 160 % error in the incremental present worth. Increasing the MARR moves in favor of A, but hurts both.
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Effect of Profit per Barrel An error of 67 % in the price of oil leads to an 26 % error in the incremental present worth. Doesn’t change the decision.
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Spider Plot B-A Sensitivity
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Sensitivity Analysis The previous example allowed for sensitivity between two options using incremental analysis. With multiple portfolios, we can examine all options simultaneously.
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Example Consider our previous example, but assume there are multiple projects with limited funding available. PW calculated with 15% and price of barrel oil is $70.
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Spider Plot Project5 is the most sensitive to fluctuations in the price of oil. All projects are sensitive and could lose money if falls to low.
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Making the Decision with Multiple Projects Multiple Alternatives and Multi-attribute Analysis End Part I
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Making the Decision with Multiple Projects Multiple Alternatives and Multi-attribute Analysis Part II
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Breakeven Analysis For a single project: determines the value
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Module23 - Making the Decision with Multiple Projects...

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