Traditional engineering economic analysis uses estimated parameters (costs, savings, interest rates).

• Risk: A "measurable uncertainty," where probabilities of outcomes can be estimated (e.g., supplier delay based on historical data).
• Uncertainty: An "unmeasurable risk," where probabilities are unknown (e.g., impact of a new regulation).

Sensitivity Analysis and Graphs

How sensitive is our project's viability to changes in a single input parameter?

Process

1. Calculate the base case PW.

2. Vary each key parameter (First Cost, Annual Savings, MARR, etc.) one by one.

3. Recalculate PW for each variation.

4. Plot the results.

   

• Advantages: Excellent for communication; clearly identifies critical parameters.
• Disadvantages: Only varies one parameter at a time; does not show interactions between parameters; limited to the range analyzed.

Break-Even Analysis

At what value of a parameter does the project become just worthwhile (i.e., break even)

• For a single project, find the parameter value where PW=0 or AW=0. This is the threshold.
  • For example, the break-even MARR is the project's Internal Rate of Return (IRR).
• For multiple, mutually exclusive projects, find the parameter value where the economic measure (e.g., AW) for both projects is equal.

Process

• Formulate the PW or AW equation for the project(s).
• Set the equation equal to zero (for a single project) or set the equations for two projects equal to each other.