Sensitivity analysis is used to incorporate risk into a cost benefit analysis. There are several approaches to sensitivity analysis. These approaches vary from applying percentage changes to benefit and cost categories to Monte Carlo Simulation on costs and/or benefits.
The video looks at the project outputs sensitivity tester (POST) model that I have developed in Microsoft Excel. The model requires analysis to be conducted in the user’s original model prior to the use. This analysis should include identification and calculation of all relevant scenarios. The outputs of these scenarios are to be entered into POST.
POST can be used to calculate a distribution of investment costs and can include as many as ten contingencies. Along with the distribution of costs, POST also calculates the P10, P50, P90, expected value, and standard deviation. This function of POST is recommended if only a base cost estimate or a strategic estimate is available. This function is not recommended if a full cost estimate has been conducted.
The strength of the POST model is its capability to calculate distributions of benefits using assigned probability as well as Monte Carlo Simulation. The user of the model can identify up to six non-correlated parameters to adjust in the analysis. The user is able to adjust the parameters up or down. POST is capable of calculating all possible combinations of changes to parameters. Using the results, POST will provide distributions of the project’s benefit cost ratio (BCR) and net present value (NPV).
POST also runs Monte Carlo Simulation of 2000 iterations to support the distribution calculated using all possibilities. As only six non-correlated parameters are adjusted, 2000 iterations should provide an accurate result. POST presents the NPV and BCR at P10, P50, and P90 as well as provides the expected value (recommended to be reported as the final result) and the standard deviation. POST also includes the probability the project will exceed the cut-off/hurdle BCR. The cut-off/hurdle BCR is the minimum BCR required for the project to be considered for funding.
The video can be watched at the link below:
This video is a follow up to another cost benefit analysis sensitivity analysis video that is currently published on this channel. This video is available at:
The cost benefit analysis series is available at:
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