decision and risk analysis sensitivity analysis on values

Decision and Risk Analysis

Sensitivity analysis on Values


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


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 paidAs cash downOr 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.


Eagle Airlines -Case Study

Profit

Price

Insurance

Operating_Cost

Interest_Rate

Hours_Flown

Capacity_Sched_Flights

Ratio_Chartered_Scheduled

Charter_Price

Ticket_Price

Purchase_Seneca

Finance_Cost

Total_CostRevenue

Proportion_Financed

NOTE: Diagram created using Netica©, a probability network (“Bayes nets”) tool. Netica is an alternative tool for solving influence diagrams, among other uses.


230000-220025 = $ 9975 profit at base value of all parameters


One-Way Sensitivity AnalysisTo buy planes 40% of $87500 will be financed so 60% of $87500 =$52500 will cash downOr 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


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/


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 valueIf the intention is to make atleast $4200 profit the most important variables are the first four on the tornado diagram


Eagle Airlines -Two Variable Plot

Base value capacity 0.5Base value Op cost 245

At base value it’s a profit situation to buyplanes

Point C is a slightdeviation from base value and the resultis a loss to buy planes


Sensitivity analysis on Weights


Eagle Airlines -Three Variable Tree

decision and risk analysis sensitivity analysis on values

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