Uncertainty in Future Events Chapter 10: Newnan, Eschenbach, and Lavelle Dr. Hurley’s AGB 555 Course

Ways Of Dealing with Uncertain Events Range of Estimates Look at what the metrics (e.g., PW) are for an optimistic estimate, a most likely estimate, and a pessimistic estimate You could calculate the metric used in project management (Optimistic Value + 4*Most likely Value + Pessimistic Value)/6 Calculate Expected Values Expected value is the sum of the outcomes multiplied by their probabilities Economic Decision Trees These represent more complex investments that may or may not have a probabilistic nature to them and potentially multiple decisions need to be made

Economic Decision Trees In economic decision trees, you have three main components: A decision node ( )where you get to make some decision out of a set of possibilities A chance node ( ) where multiple outcomes can occur each with their own probability An outcome node ( )is the result of a set of decisions and chance outcomes In class we will discuss problem from the textbook

Risk

Simulation This method uses random sampling from a probability distribution It makes many draws from the sample and calculates a metric for the draws, e.g., IRR, PW, EUAC, etc. Useful Excel tools for doing simulations Under Data Analysis, there is a random number generator Using the Rand() function with the Norm.Inv() function will draw a random value from the normal distribution RandBetween() will draw from a uniform distribution