1. Decision and Risk Analysis Sensitivity analysis on Values

2. Decision and Risk Analysis One-Way Sensitivity Analysis Only one factor is varied at a time All others are held at the nominal (base) values Need to establish the range over which the variable will vary –Maybe there is a known range –Vary by percentage (e.g. +/- 30%) Bottom Line: Does a change in the variable affect the output – and therefore, the decision Also Important: If not, we don’t have to worry about the variable

3. Decision and Risk Analysis Eagle Airline case study Decision to be made: Invest in Money market at 8% growth or buy planes and run a business. To buy planes 40% of $87500 will be financed so 60% of $87500 =$52500 will be paid As cash down Or use $52500 in money market to earn 8% of 52500 as interest = $4200 per year Obviously plane option is profitable only if you can make more than $4200 per year.

4. Decision and Risk Analysis Eagle Airlines - Case Study NOTE: Diagram created using Netica ©, a probability network (“Bayes nets”) tool. Netica is an alternative tool for solving influence diagrams, among other uses.

5. Decision and Risk Analysis 230000-220025 = $ 9975 profit at base value of all parameters

6. Decision and Risk Analysis One-Way Sensitivity Analysis To buy planes 40% of $87500 will be financed so 60% of $87500 =$52500 will cash down Or use $52500 in money market to earn 8% of 52500 as interest = $4200 per year Obviously plane option is profitable only if you can make more than $4200 per year. To draw the purchase Seneca (aircraft) line you must calculate profit=revenue-cost and vary hours flown to get atleast 2 points on the line (see page 178 for calculation) From Graph, plane option is profitable only if it flies for 664 hours

7. Decision and Risk Analysis Tornado Diagram Used to compare one-way sensitivity analyses for all relevant variables Free software available at http://www.tushar-mehta.com/excel/software/tornado/

8. Decision and Risk Analysis Eagle Airlines - Tornado Diagram Each bar is the range of profit when that variable is changed from its lower to upper bound while maintaining other variables at base value If the intention is to make atleast $4200 profit the most important variables are the first four on the tornado diagram

9. Decision and Risk Analysis Eagle Airlines - Two Variable Plot Base value capacity 0.5 Base value Op cost 245 At base value it’s a profit situation to buy planes Point C is a slight deviation from base value and the result is a loss to buy planes

10. Decision and Risk Analysis Sensitivity analysis on Weights

11. Decision and Risk Analysis Eagle Airlines - Three Variable Tree