The objective of Chapter 11 is to illustrate breakeven and
sensitivity methods for investigating variability in outcomes
of engineering projects.
Principle 6 – Make Uncertainty Explicit!
Breakeven and sensitivity analysis are used to help
understand how our decision might be affected if our original
estimates are incorrect.
Warm-Up Problem
The following cashflow estimates have been prepared for a proposed
ultrasound device. The MARR = 8% per year and the study period is 10 years.
Cashflow
Estimated Value
Investment cost
$X
Annual revenues
$70,000
Annual expenses
$43,000
Market value
$0
What is the largest amount the investment cost can be to have an acceptable
proposal?
We will follow this up with a Slido Poll for you to share your answer.
We Use Sensitivity Analysis to See What Happens to
Project Profitability When the Estimated Value of Study
Factors are Changed for a Proposed Project
• What if expenses are 10% higher than expected—is the
project profitable?
• What if sales revenue is 15% lower than expected?
• What change in either expenses or revenues will cause
the project to be unprofitable (decision reversal)?
Spreadsheets are Useful in Performing Sensitivity Analysis
• Formulas easily reflect changes in parameter values.
• Tables and plots can provide quick answers and visual
cues to the effect of changes.
• A spiderplot can be especially useful in sensitivity
studies.
Note that the steeper the curve, the more sensitive is the PW to the factor.
The following cashflow estimates have been prepared for a proposed
ultrasound device. The MARR = 8% per year and the study period is 10 years.
Cashflow
Estimated Value
Investment cost
$150,000
Annual revenues
$70,000
Annual expenses
$43,000
Market value
$0
Your turn!
Acme Delivery is considering a proposal for new package tracking technology. The
system has an estimated initial cost of $1.9 million and will require maintenance
expense of $140,000 each year. Acme estimates that improved tracking will save
approximately $680,000 per year. Acme has a MARR of 12% per year, and the study
period for this technology is 6 years, after which time Acme expects the entire system
will need to be replaced.
Develop a spiderplot showing the sensitivity of the decision to invest in this proposal
with respect to:
(1) capital investment
(2) maintenance expense, and
(3) tracking savings.
To which of these factors is the decision most sensitive?
You can follow the approach we used to solve the Ultrasound device problem.
We will have a Slido quiz that will allow you to put in your calculated values.