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

2. 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.
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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.
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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
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Table 11.5
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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.
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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.
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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.
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Summary
Introduction
Sensitivity Graphs
Break-Even Analysis
For a single project
For multiple projects
Scenario Analysis
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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?
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Quiz 4---When and Where
Quiz: Tuesday, Nov. 8, 2005
11: :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)
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16. 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
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Quiz---Contact Info
Wei Li
Group 1 +Group 2
CraigTipping   
Group 1 (Last Name A-M) ELL 168
LeYang            
Group 2 (Last Name N-Z) ELL 061
Do not send me at 2:00am Nov. 8 for help;
Do not ask for the problems, Wei was a student.
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