Module 14: Sensitivity Analysis

SI-4251 Ekonomi Teknik

Muhamad Abduh, Ph.D.

SI-4251 Ekonomi Teknik

Outline Module 14 What is Sensitivity Analysis? Steps in Sensitivity Analysis Sensitivity Graph Spider Web Comparing Two or More Alternatives

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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

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SI-4251 Ekonomi Teknik

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.

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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 assurance that all information is accurate

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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 factor3. Select an economic evaluation method (present worth,

future worth, annuity, or rate of return) for each factor4. Compute values based on variable of factors5. Plot chart (if necessary)

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SI-4251 Ekonomi Teknik

Sensitivity Graph

Muhamad Abduh, Ph.D.14-7

NET CASH FLOW IN

CO

ME

( + )

LOSS

( - )

0

SI-4251 Ekonomi Teknik

Sensitivity Graph

Muhamad Abduh, Ph.D.14-8

NET CASH FLOW IN

CO

ME

( + )

LOSS

( - )

0

i

i*

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Sensitivity Graph

Muhamad Abduh, Ph.D.14-9

NET CASH FLOW IN

CO

ME

( + )

LOSS

( - )

0AOC

O&M*

SI-4251 Ekonomi Teknik

Sensitivity Graph

Muhamad Abduh, Ph.D.14-10

NET CASH FLOW IN

CO

ME

( + )

LOSS

( - )

0Yearly

ProductionVol*

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Sensitivity Graph

Muhamad Abduh, Ph.D.14-11

NET CASH FLOW IN

CO

ME

( + )

LOSS

( - )

0

?

SI-4251 Ekonomi Teknik

Spider Web

Muhamad Abduh, Ph.D.14-12

0 +10 +20 +30 +40-40 -30 -20 -10

+1000

+2000

+3000

+4000

+5000

+6000

- 6000

- 5000

- 4000

- 3000

- 2000

- 1000

Present Worth

A

n

i

% error in estimate

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Comparing Two or More Alternatives The decision to select an alternative depends on

how sensitive the alternative given a set of decision range

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Ann

ual E

quiv

alen

t Am

ount

(-)

(+)

0

Alt A

Alt B

Alt C

range alternative

n < N1 No alternative

N1 < n < N2 Alternative A

N2 < n < N3 Alternative C

> N3 Alternative B

N1 N2 N3

SI-4251 Ekonomi Teknik

Exercise Dua alternatif mesin produksi masing-masing mempunyai karakteristik sebagai berikut:

Lakukan sensitivity analysis terhadap IRR; variasi harga jual produk +/- dua digit terahir NIM saudara x Rp 100,- (Gunakan aplikasi komputer, spreadsheet)

Muhamad Abduh, Ph.D.14-14

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