2.ParametersThe term parameter used to represent aby variable for which an estimate or state value isessential. Example are the first cost, salvage value, Opportunity cost, estimated useful life,production rate and material costs. 3.Spider GraphSpider graph is a graph percentage change for each parameter versus the measure of worth.This graph is helpful when the sensitivity of several parameters is considered for one methodsusing a single method of measure of worth. 4.Three Estimates Sensitivity AnalysisIn project scheduling, the concept of making three estimates for each parameter is useful. Thisconcept can also be used for economic analysis by determining the advantages anddisadvantages among two or more alternatives. This three estimates are pessimistic, mostlikely and optimistic estimates.5.Expected ValueExpected value is a long –run average observation if the project is repeated many times. For asingle occurrence, the expected value is a substantial value6.Point EstimatesPoint estimates is an expected value if a particular alternative or methods is evaluated orimplemented only once.7.Decision TreeA decision tree includes the following conditions:a.More than one stage of alternative selectionb.Selection of an alternative at one stage that leads to another stagec.Expected results from a decision at each stage d.Probability estimates for each outcomee.Estimates of economic value (cost or revenue) for each outcomef.Measure of worth as the selection criterion such as the expected value of the present worthE(PW)The decision tree is constructed from LEFT to RIGHT and includes each possible decision andoutcome.1. A square represents a DECISION NODE with the possible alternatives indicated on thebranches from the decision node2.A circle represents a PROBABILITY NODE with the possible outcomes and estimatedprobabilities on the branchesPage 90of 100
College of Engineering Education2ndFloor, B&E BuildingMatina Campus, Davao CityTelefax: (082) 296-1084Phone No.: (082)300-5456/300-0647 Local 1333.The tree like structure results with outcome following a decision.Usually each branch of a decision tree has some estimated economic value (often referred toas PAYOFF) in cost, revenue, saving or benefit. These cash flows are expressed in terms of PW,AW or FW values. The cash flow and probability estimates on each outcome branch are used in calculating theexpected economic value of each decision branch. This process, called SOLVING THE TREE orROLLBACK.SUPPLEMENTARY PROBLEMS:Example 1.1A civil engineer is evaluating 3 methods for new equipment at Electronic Company. He hasmade three estimates for the salvage value, annual operating cost, and a useful life. Theestimates are presented on an alternative by alternative basis as shown in the Table. Forexample, alternative B has pessimistic estimates of 500 pesos, AOC = -4000pesos and a usefullife of 2 years. The first costs are known so they have the same value.