decision and risk analysis sensitivity analysis on values
TRANSCRIPT
Decision and Risk Analysis
Sensitivity analysis on Values
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
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 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.
Decision and Risk Analysis
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.
Decision and Risk Analysis
230000-220025 = $ 9975 profit at base value of all parameters
Decision and Risk Analysis
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
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/
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 valueIf the intention is to make atleast $4200 profit the most important variables are the first four on the tornado diagram
Decision and Risk Analysis
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
Decision and Risk Analysis
Sensitivity analysis on Weights
Decision and Risk Analysis
Eagle Airlines -Three Variable Tree