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Breakeven & Sensitivity

The document discusses breakeven and sensitivity analysis methods for evaluating engineering project outcomes under variable conditions. Breakeven analysis determines the output volume where costs equal revenues. Sensitivity analysis explores how changes to estimated factors impact project profitability. Both methods provide crucial economic information for decision making by identifying sensitive parameters and their break even points. Spreadsheets are useful for implementing these techniques and generating tables and graphs to visualize results.

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Electrical Engineering
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71 views10 pages

Breakeven & Sensitivity

The document discusses breakeven and sensitivity analysis methods for evaluating engineering project outcomes under variable conditions. Breakeven analysis determines the output volume where costs equal revenues. Sensitivity analysis explores how changes to estimated factors impact project profitability. Both methods provide crucial economic information for decision making by identifying sensitive parameters and their break even points. Spreadsheets are useful for implementing these techniques and generating tables and graphs to visualize results.

Uploaded by

Electrical Engineering
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Breakeven & Sensitivity

Analysis
 The objective is to illustrate breakeven and sensitivity
methods for investigating variability in outcomes of
engineering projects.
 In engineering economy studies ,breakeven and sensitivity
analysis are general methodologies, readily available for
providing information about the potential impact on equivalent
worth due to variability in selected factor estimates.
 Their routine use is fundamental to developing economic
information crucial for decision making.
BREAK EVEN ANALYSIS

 Break even analysis is concerned with finding the BREAK-EVEN-POINT


 The point at which revenues and costs are exactly equal
 Thus this is a volume of output at which neither a profit is made nor a loss is incurred
 This analysis can be carried out either algebraically or graphically
 When the selection between two engineering project alternatives (or outcomes) is heavily dependent on
a single factor, we can solve for the value of that factor (the break even point)
 In mathematical terms,
 EWA = f1(y) & EWB = f2(y),
 EWA = an equivalent worth calculation of Alternative A;
 EWB = the same equivalent-worth calculation of Alternative B;
 y = a common factor of interest of Alternative A and Alternative B.
 Therefore, the breakeven is the value y
 i.e;
 EWA = EWB, or fl(y) = f2(y), which may be solved for y.
 Consider a hybrid vehicle with a sticker price of $31,500. This vehicle will average 30 miles per
gallon of gasoline. A tax credit of $1,500 for the hybrid vehicle effectively reduces its sticker price to
$30,000. A comparably equipped gasoline-only vehicle will cost $28,000 and will average 25 miles
per gallon of gasoline. Assuming an interest rate of 3% per year and a study period of five years, find
the breakeven cost of gasoline ($/gal) if the vehicle will be driven18,000 miles each year.
 Develop an equivalent-worth equation in terms of the factor of interest—the cost of gasoline
 Develop equivalent uniform annual cost (EUAC) expressions for each of the vehicles.
 Letting X = cost of gasoline, we get the following EUAC equations.
 Hybrid:
 EUACH(3%) = ($31,500 − $1,500)(A/P, 3%, 5)+($X/gal) [(18,000 mi/year)/(30 mi/gal)]
 Gas-only:
 EUACG(3%) = $28,000(A/P, 3%, 5) + ($X/gal)[(18,000 mi/year)/(25 mi/gal)]
 Setting EUACH(3%) = EUACG(3%) and solving for X, we find the breakeven cost of gasoline to be
 X = $3.64/gal
Breakeven Chart for Hybrid versus Gas-Only Vehicle
Sensitivity Analysis
 Sensitivity analysis aanalyzing risks in an engineering projectids us
in
 This kind of analysis is used to explore what happens to a project’s
profitability when the estimated value of study factors are
changed . When small variations in a particular estimate would
change selection of the alternative the decision is sensitive to the
estimate.
 It is used in analyzing project risks by changing the values of key
variables to test what will be the effect of profitability.
 It is also known as “What if analysis” because it answers questions
such as what if incremental analysis are increased or decreased ?
Process of performing sensitivity analysis

 It starts with a base case situation developed by using the


most likely value of the input ( we then change the specified
variable of interest by several specified percentages above
and below the most likely variable holding all other variables
constant)
 Calculate the new net present worth of these new values
(sensitivity graphs)
 The slopes of the graphs in sensitivity will depict how
sensitive the net present worth will be with the change of input
Spreadsheets
 Spreadsheets are very useful in performing sensitivity
analysis.
 Formulas easily reflect changes in parameter values.
 Tables and plots can provide quick answers and visual cues
to the effect of changes
 A spider plot can be especially useful in sensitivity studies.
 It can be useful to examine more than one alternative on a
plot, or to examine sensitivity of incremental cash flows
Spider graph sensitivity
analysis measures the impact on project
economics as a result of changing one or
more of the parameters within the given
range
Analyzing these impacts can help a mining
company determine, which model inputs
result in the greatest change in the project
economics

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