Engineering Economics in Canada Chapter 11 Dealing with Uncertainty: Sensitivity Analysis

Sensitivity Analysis Methods Sensitivity graphs illustrate the sensitivity of a particular measure (e.g., present worth or annual worth) to changes in the uncertain parameters of a project. Break-even analysis can answer such questions as: “What production level is necessary in order for the PW of a project to be greater than zero?” Break-even analysis can also give insights into comparisons between projects. Scenario analysis allows us to look at the impact of varying several parameters at a time. Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. 11.4 Scenario Analysis Scenario analysis is the process of examining the consequences of several possible sets of variables associated with a project. Commonly used scenarios are the “optimistic” (or “best case”) outcome, the “pessimistic” (or “worst case”) outcome, the “expected” (or “most likely”) outcome. The best- case and worst- case outcomes can capture the range of possible outcomes for a project, or a comparison among projects. Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. Example 11.4 Cogenesis (refer to Example 11.1) wishes to do a scenario analysis of their cogeneration problem in order to decide whether the project should be undertaken. They have established optimistic, pessimistic, and expected estimates of each of the parameters for their decision problem. The three scenarios and the associated estimates are summarized in Table 11.5 Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. Table 11.5 Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. Example 11.4 Observations The scenario analysis reveals that the present worth of the cogeneration plant will be negative if all parameters take on their worst- case values both the expected-case and best-case scenarios lead to positive present worths There is some risk that the cogeneration project will have a negative PW if worst-case scenario occurs. However, even if the worst-case outcome does occur, the loss is not huge compared with the potential gain in the other two cases. Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. Scenario Analysis The use of scenarios allows an analyst to capture the range of possible outcomes for a project or group of projects. Done in combination with sensitivity graphs and break-even analysis, a great deal of information can be obtained regarding the economic viability of a project. Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. Scenario Analysis The one drawback common to each of the three sensitivity analysis methods covered in this chapter is that they do not capture the likelihood that a parameter will take on a certain value or the likelihood that a certain scenario will occur. This information can further guide a decision maker and is often crucial to assessing the risk of the worst case outcome. Chapter 12 will describe how these concerns are addressed. Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. Summary Introduction Sensitivity Graphs Break-Even Analysis For a single project For multiple projects Scenario Analysis Copyright © 2006 Pearson Education Canada Inc.

Project----Time Table Find your group: Mid-October Select Topic: End of October Survey finished: End of Nov. 7 Project: November (3 Weeks) Project Report Due: Final Quiz Copyright © 2006 Pearson Education Canada Inc.

Project----What Wei Wants You are a college student, show me your ideas No exams out of university Do a good job: Knowledge: 20-50% Teamwork, independent work, management, public relation, ability to learn>50% Wei: Put you in nowhere to see your ability Jump out of this do-the-assignment system Copyright © 2006 Pearson Education Canada Inc.

Project----Requirements Group: 3-6 Students should be done now Topic: Practical, means real data, meaningful topic , should be almost done now Length: 15 pages-30 printed pages (12pt). Report: On Time, Original, Clear, teamwork. Marks: 1 mark to 1 report, one group No spoon feed: Independent Team work Report: 25 marks out of 100 Copyright © 2006 Pearson Education Canada Inc.

Project Topic----What to do You studentS find the topic (chat chat chat chat….FEDEX DELL GOGGLE) Do what you like, and what you think is meaningful, and connected to your life Those who ask me how many equations should be in the report (>10? >=9?) again get 5 marks deduction each time. Not necessary a pure economic topic, the area is OPEN, just do with the economic backgrounds in mind, OPEN your choice Copyright © 2006 Pearson Education Canada Inc.

Project----Recourse—Be Active! Goggle, Library Canaidan Government Web Car Dealer, Dollar store owner Teacher, Unions, Lawyer Starting business, stopping business Economics Faculty Newspaper, TV Your Parents, Friends Go beyond the campus!!!!!!!!! Did you notice? Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. Quiz 4---When and Where Quiz: Tuesday, Nov. 8, 2005 11:30 - 12:20 (Quiz: 30 minutes) Tutorial: Tuesday, Nov. 15, 2005 ELL 168 Group 1 (<95) (Students with Last Name A-M) ELL 061 Group 2 (<60) (Students with Last Name N-Z) Copyright © 2006 Pearson Education Canada Inc.

Quiz---Based on Chapter 10, 11 Important: Wei’s Slides More Important: Examples in Slides 1 Formula Sheet is a good idea 2 Questions for 1800 seconds. Wei used 754 seconds Bring: Paper, Pen, Formula Sheet, Calculator, Student Card Write: Name, Student No. and Email Copyright © 2006 Pearson Education Canada Inc.

Copyright © 2006 Pearson Education Canada Inc. Quiz---Contact Info Wei Li wli@ece.uvic.ca Group 1 +Group 2 CraigTipping    ctipping@uvic.ca Group 1 (Last Name A-M) ELL 168 LeYang             yangle@ece.uvic.ca       Group 2 (Last Name N-Z) ELL 061 Do not send me Email at 2:00am Nov. 8 for help; Do not ask for the problems, Wei was a student. Copyright © 2006 Pearson Education Canada Inc.