EMGT 6300 Project Management Labl Economic Sensitivity Analysis Instructions 1. Develop PW equation 2. Vary the value of Annual Income by +/- 5% 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45% and 50% and re-compute PW values 3. Plot PW-% deviation graph 4. Repeat Steps 2 and 3 for Initial Investment, Salvage Valuel Annual Expenses, and Life 5. Identify the interval of variation for which the project is acceptable for each factor 6. Identify the interval of variation for which the project is not acceptable 7. Identify two of the most important parameters (steepest slopes) 8. Develop the Indifference Curve for the selected parameters 9. Examine the Indifference Curve and make further observations Many economic analyses require estimates and forecasts of data that may be inaccurate. The effects of inaccurate data can be analyzed by means of a sensitivity analysis. A sensitivity analysis measures the relative magnitude of change in an element that will reverse a decision among alternatives. Sensitivity graph can be used to show the influence of changes in economic parameters, Abscissa: % deviation of a variable from its original value Ordinate: net present worth of the alternative being examined Sensitivity curves are generated by substituting various values for one factor in PW equation while holding other values constant. Steeper Slope of curve indicates greater sensitivity of PW to that factor. Indifference Curve Indifference curve done by plotting the limiting combinations for accepting or rejecting proposal as an ISOQUANT (indifference line shows combinations of parameter 1 and parameter 2 that make PW=0). Parameter 1 Parameter A Net PWS PW=0 Parameter B PW>0 Accept .....-30-20-10 0 10 20 30 ....... % deviation PW0 Accept .....-30-20-10 0 10 20 30 ....... % deviation PW