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Scenario Analysis

Chapter 6 discusses risk analysis methods, particularly scenario analysis, which estimates cash flows and asset values under various scenarios to assess risk impacts. An engineer evaluates alternatives for new equipment using annual worth (AW) analysis and net present worth (NPW) calculations for different scenarios, concluding that alternative B is the most economical. The analysis indicates a favorable investment outlook with profits calculated for worst, most likely, and best-case scenarios.

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shoojeet adhikari
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13 views8 pages

Scenario Analysis

Chapter 6 discusses risk analysis methods, particularly scenario analysis, which estimates cash flows and asset values under various scenarios to assess risk impacts. An engineer evaluates alternatives for new equipment using annual worth (AW) analysis and net present worth (NPW) calculations for different scenarios, concluding that alternative B is the most economical. The analysis indicates a favorable investment outlook with profits calculated for worst, most likely, and best-case scenarios.

Uploaded by

shoojeet adhikari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 6

Risk Analysis

09-Oct-20 1
Methods of Describing Risk
• Scenario Analysis
In scenario analysis, we estimate expected cash
flows and asset value under scenarios, with the
intent of getting a better sense of the effect of
risk on value. Estimation of one or more
factors is done in a favorable (Optimistic)
direction & in an unfavorable (pessimistic)
direction to investigate the effect of these
changes on study results.
09-Oct-20 2
Question: An engineer is evaluating three alternatives for new equipment at
Emerson Electronics. She has made three estimates for the salvage value,
annual operating cost, and life. The estimates are presented on an
alternative-by-alternative basis in Table 18–1. For example, alternative B
has pessimistic estimates of S $500, AOC $4000, and n 2 years. The first
costs are known, so they have the same value. Perform a scenario analysis
and determine the most economical alternative, using AW analysis at a
MARR of 12% per year.

09-Oct-20 3
Solution
For each alternative in Table 18–1, calculate the AW value of
costs. For example, the AW relation for alternative A,
pessimistic estimates, is
AW = - 20,000(AP,12%,3) -11,000 = $-19,327
Table 18–2 presents all AW values.

Since the AW calculated using the ML estimates for alternative B


($−8229) is economically be er than even the op mis c AW
value for alternatives A and C, alternative B is clearly favored.

09-Oct-20 4
Question: From the following information, calculate NPW for
each scenario by assuming I= 1,25,000. MARR=15% & life of
project is 5 years.

Variable Worse- case Most likely- case Best- case


considered scenario scenario scenario

Unit 1,600 2,000 2,400


demand/year
Unit price 48 50 53
Variable cost/ 17 15 12
year
Fixed cost/year 11,000 10,000 8,000
Salvage Value 30,000 40,000 50,000
09-Oct-20 5
Solution:
NPW of worse-case scenario at 15%
=-1,25,000+1,600*(48-17)*(P/A, 15%, 5)-
11,000*( P/A, 15%, 5)+30,000(P/F,15%,5)
=-1,25,000+1,600*(48-17)* -11,000*
+30,000*
=19,303.2 (Profit)

09-Oct-20 6
NPW of Most likely case scenario at 15%
=-1,25,000+(2,000*50-2,000*15-10,000)*(P/A,
15%, 5)+40,000(P/F,15%,5)
=-1,25,000+ 60,000*3.352+40,000*0.4972
=96,008 (Profit)
NPW of Best case scenario at 15%
=-1,25,000+(2,400*53-2,400*12-8,000)*(P/A,
15%, 5)+50,000(P/F,15%,5)
=-1,25,000+ 90,400*3.352+50,000*0.4972
=2,02,880 (Profit)
It indicates that there is no risk of investment.
09-Oct-20 7
Thank You

09-Oct-20 8

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