Module 14: Sensitivity Analysis

SI-4251 Ekonomi Teknik

Muhamad Abduh, Ph.D.
Outline Module 14
 What is Sensitivity Analysis?
 Steps in Sensitivity Analysis
 Sensitivity Graph
 Spider Web
 Comparing Two or More Alternatives

2 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.

What is Sensitivity Analysis?
 Any economic analysis uses estimate of future
happening to assist decision makers, and the
accuracy of prediction of future outcome of a
venture depends on the quality of knowledge
about the future.
 However, our ability to accurately predict the
future is far too limited, if not impossibly
accurate. Therefore, the estimate will likely
be in error.
 Sensitivity analysis is a study to determine how
(economic) decision will be altered due to the
variation of values of economic factors

3 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
What is Sensitivity Analysis?
 An alternative is said to be sensitive if the
decision upon the selection of that alternative
depends on the changes in the values of
estimate.
 An alternative is said to be insensitive if the
decision is not altered with the change if
values of estimate
 Sensitivity analysis allows decision makers to
determine how sensitive would their final
decision be to changes in values of estimates.

4 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.

Illustration
 Decision of investment depends on the future
cash flow (cash in – cash out). In turn, the
cash flow itself depends on the future
economic condition; i.e. the actual interest
rate applied (and many others)
 A potential venture requires an initial investment
of US$ 2.75 millions and annual O&M cost
estimated at US$ 325.000. The expected
production rate is 20,000 per year, expected
sale will be 90% at the price of US$ 175 a piece.
If the salvage value at the end of 12 years is
estimated at US$ 450,000 and the interest rate
is set at 10% p.a., would you consider this
opportunity?
 To answer this question one must have
5 assurance that all information is Muhamad
SI-4251 Ekonomi Teknik accurate
Abduh, Ph.D.
Steps in Sensitivity Analysis
1.Determine factors that are most likely to
vary from estimated value
2.Select the probable range of variation of
each factor
3.Select an economic evaluation method
(present worth, future worth, annuity, or
rate of return) for each factor
4.Compute values based on variable of factors
5.Plot chart (if necessary)

6 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.

Sensitivity Graph
NET CASH
FLOW
INCOME ( + )

0
LOSS ( - )

7 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.

Sensitivity Graph
NET CASH
FLOW
INCOME ( + )

i
0 i
*
LOSS ( - )

8 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.

Sensitivity Graph
NET CASH
FLOW
INCOME ( + )

AOC
0 O&M
*
LOSS ( - )

9 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.

Sensitivity Graph
NET CASH
FLOW
INCOME ( + )

Yearly
0 Producti
Vol * on
LOSS ( - )

10 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.

Sensitivity Graph
NET CASH
FLOW
INCOME ( + )

?
0
LOSS ( - )

11 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.

Spider Web
Present Worth
+600
0 A
+500
0
+400
0
+300 n
0
+200
0
+100
0 i
- - - - 0 +1 +2 +3 +4
40 30 20 10 0 0 % error
0 in0 estimate
-
1000
-
2000
-
3000
-
4000
-
5000
-
12 6000Ekonomi TeknikMuhamad Abduh, Ph.D.
SI-4251
Comparing Two or More Alternatives
 The decision to select an alternative depends on
how sensitive the alternative given a set of
decision range
(+) Alt B
Annual Equivalent Amount

Alt A
Alt C
0 N1 N2 N3
range alternative
n < N1 No alternative
N1 < n < N2 Alternative A
(-) N2 < n < N3 Alternative C
> N3 Alternative B
13 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Exercise
 Dua alternatif mesin produksi masing-masing mempunyai karakteristik sebagai
berikut:
Mesin A Mesin B

Kapasitas produksi / tahun 550.000 unit 625.000 unit

 Perkiraan produksi terjual 95% 97.5%

 Nilai investasi awal Rp 18.750.000.000 Rp 19.200.000.000

 Usia guna 8 tahun 8 tahun
 Nilai jual lagi Rp 4.750.000.000 Rp 4.250.000.000
 Harga jual produk / unit Rp 685.750 Rp 685.750

Biaya produksi langsung / unit Rp 125.800 Rp 110.000

Biaya produksi tidak langsung / tahun Rp 240.000.000 Rp 210.000.000

Metoda depresiasi: Garis lurus Garis lurus



14 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.