9 10 Sensitivity Analysis

+
9 10
SENSITIVITY
ANALYSIS
(Making Hard Decisions)
Debrina Puspita Andriani

Teknik Industri
Universitas Brawijaya
e-Mail : debrina@ub.ac.id
Blog : http://debrina.lecture.ub.ac.id/
Outline
14/11/14
www.debrina.lecture.ub.ac.id
+9
SENSITIVITY ANALYSIS
Problem Identification and Structure
One-Way Sensitivity Analysis
14/11/14
Introduction
n Purpose
n
n
of sensitivity analysis:
To analyze what really matters in the decision problem
To construct a requisite decision model
Examples of sensitivity analysis techniques in DA:

n Determine if deterministic dominance or stochastic
dominance is present
n Identify the important variables through Tornado
Diagrams
n Identify interaction effects between important variables
n Identify the importance of probability assessments
(which are also variables)
14/11/14
+ The Eagle Airline Case (1)
Dick Carothers wants to expand his operation

n
Midwest has to offer

n
An airplane @ price $95,000 (He can probably buy the plane for $85,000
- $90,000)
An option to buy the airplane a year later (cost of the option

$2,500 - $4,000)
Currently
n
n
n
Eagle Airlines owns 3 planes
60% of flights are chartered flights and 40% are scheduled
Cost data Midwest plane:

n
New engines, FAA maintained
Contains all equipment that Eagle Airline needs

n Has 5 seats
n Operating cost $245 per hour (fuel, maintenance,pilot salary)
n Fixed cost $20,000 (=yearly insurance) + Finance charges
n
14/11/14
+ The Eagle Airline Case (2)
Dick Carothers wants to expand his operation

n
Finance charges:
n
Revenue data
n
n
n
Chartered flights: $300 - $400 per hour

Scheduled flights: $100 per person per hours, plains are on average 50%
full
Expected number of hours flown with new plane 800-1000
Variables in control
n
n
Borrow 40% of the price at 2% above the prime rate (=9,5%, but subject
to change)
The price he is willing to pay

The amount finance
Variables not in control

n
n
Insurance cost
Operation cost
Carothers could always invest his cash $52,500.

@8% yearly interest rate, yielding an annual
interest in the first year of $4,200
What should Dick Carothers do?
14/11/14
+ Influence Diagram Keputusan Eagle Airline

Gambar tersebut adalah Initial Influence Diagram yang hanya terdiri dari
dari decision node
14/11/14
Problem Identification Level
14/11/14
Problem Structure Level (1)
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10
14/11/14
11
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12

Low
Hours Flown
Charter Price per hour
Ticket Price per hour
Occupancy Rate on Scheduled Flights
% of Charter Flights
Operating Cost per Hour
Insurance
Proportion Financed
Interest Rate
Purchase Price
Revenue From Charters
Revenue From Scheduled Flight
Fixed Cost
Variable Cost
Total Revenue
Total Cost
Total Profit
Base
High
500
$300.00
95
$0.40
0.45
$230.00
18000
$0.30
0.105
$85,000.00
800
$325.00
100
$0.50
0.5
$245.00
20000
$0.40
0.115
$87,500.00
1000
$350.00
108
$0.60
0.7
$260.00
25000
$0.50
0.13
$90,000.00
$67,500.00
$52,250.00
$20,677.50
$115,000.00
$130,000.00
$100,000.00
$24,025.00
$196,000.00
$245,000.00
$97,200.00
$30,850.00
$260,000.00
Using Low Values Using Base Values Using High Values

$119,750.00
$230,000.00
$342,200.00
$135,677.50
$220,025.00
$290,850.00
-$15,927.50
$9,975.00
$51,350.00
Is this a worst case best case analysis?
14/11/14
13
One-Way Sensitivity Analysis (1)
14/11/14
14

$35,000.00
Sensitivity of Profit on Hours Flown

(Keeping Everything Else Fixed)
$30,000.00
$25,000.00
$20,000.00
Profit
$15,000.00
$10,000.00
$5,000.00
$4,200
$0.00
-$5,000.00
-$10,000.00
-$15,000.00
$500.00
$600.00
$700.00
$800.00
$900.00
$1,000.00
Hours Flown
Hours Flown
Money Market
14/11/14
15

STEP 3: Perform a one-way sensitivity analysis for all
variables and plot results in a Spider Diagram
$35,000
Hours
Flown
$30,000
$25,000
Occupancy
Rate
$20,000
$15,000
Operating
Cost
$10,000
$5,000
Charter
Price
$0
-$5,000
Money
Market
-$10,000
-$15,000
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
14/11/14
16

STEP 4: Calculated payoff range is a measure of uncertainty in
payoff due to uncertainty in the free variable. Plot the payoff
ranges in a Tornado Diagram and visually determine the
important variables
5
Occupancy Rate
Rank
4
Operating Cost
Hours Flown
1
Charter Price
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
-$5,000
-$10,000
-$15,000
Profit
14/11/14
17

Tornado Diagram
14/11/14
+ 10
SENSITIVITY ANALYSIS
Two-Way Sensitivity Analysis
Sensitivity to Probabilities
14/11/14
18
19
Two-Way Sensitivity Analysis (1)
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21
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22
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23
Base Value =
+ Two-Way
Sensitivity Analysis (4)
The point labeled base value shows that when we plug in the base values for the
capacity and operating cost, we get an estimated profit that is grater than 4200$ so
the project looks promising.
However if we consider point C where operating cost is slightly more than base
(248) and capacity is slightly less than base (48%) they lead to a situation which
suggest not to buy the plane!
14/11/14
24
Sensitivity to Probability
n
Bagaimana menganalisis ketidakpastian yang terdapat pada variabel-variabel

kritis yang diidentifikasi dalam Diagram Tornado?
1.
Capacity of Scheduled Flights
2.
Operating cost
3.
Hours flown
4.
Charter price (decision variabel yang ditentukan oleh Carothers)
Asumsi:
Charothers menetapkan 2 nilai untuk masing-masing variabel yang
menjelaskan kondisi optimis dan pesimis
14/11/14
Chance Nodes
25
Dependancy
constants
Changed Influence Diagram

untuk Analisis Sensitivitas terhadap
Probabilitas
14/11/14
26
14/11/14
27
Uncertainties
n Now
that the problem is simplified, we can include

consideration about interdependencies of the
chance variables.
For example probability distribution of Hours

flown depend on Capacity of scheduled flights.
Thus r is greater than s in Decision tree.
n The
next step is to asses values to p,q,r, and s.
14/11/14
28
Sensitivity graph
n
Now we can create a two way sensitivity graph for q and r.
We write the expected value of purchasing airplane in terms

of q and r. We set p=0.5 and set s=0.8r.
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29
14/11/14
30
Decision Tree with 3 Uncertainty Variables
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31

for 3 Alternatives (1)
n
An investor has funds available to invest in one of three choices:

a high-risk stock, a low-risk stock, or a savings account that pays
a sure $500. If he invests in the stocks, he must pay a brokerage
fee of $200.
His payoff for the two stocks depends in part on what happens to
the market as a whole. If the market goes up (as measured, say,
by the Standard and Poors 500 Index increasing 8% over the
next 12 months), he can expect to earn $1700 from the high-risk
stock and $1200 from the low-risk stock. Finally, if the stock
market goes down (as indicated by the index decreasing by 3%
or more), he will lose $800 with the high-risk stock but still gain
$100 with the low-risk stock. If the market stay at roughly the
same level, his payoffs for the high- and low-risk stock will be
$300 and $400, respectively.
14/11/14
32

t = P(market up)
v = P(market sama)
P(market down) = 1 t v
14/11/14
33

1
0.8
Daerah yang memenuhi

t+v1
Cari region dimana Saving Account lebih prefer
dari Low-risk Stock :
EMV (Saving Account) > EMV (Low-risk Stock)
500 > t (1000) + v (200) + (1tv) (-100)
0.6
0.4
0.2
v<2
Savings
Account
Low-risk Stock
0.2
0.4
0.6
0.8
11 t
3
Misal: v = 0 maka :
6 = 11 t t = 0,54
t = 0 maka: v = 2
14/11/14
34

14/11/14
35

14/11/14
+ Two-Way Sensitivity Analysis:

Texaco Penzoil
36
Liedtke is unsure of court probabilities. If Liedtke thinks that p must be

more than 0.15 and q must be more than 0.35 can he make the
decision without further probability assessment?
14/11/14
37
Two-Way Sensitivity Analysis:

Texaco Penzoil
14/11/14
38

Texaco Penzoil
14/11/14
39

Texaco Penzoil
14/11/14
40

Texaco Penzoil
14/11/14
41

Texaco Penzoil
14/11/14
42

Texaco Penzoil
14/11/14

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+

Debrina Puspita Andriani

Examples of sensitivity analysis techniques in DA:

+ The Eagle Airline Case (1)

Dick Carothers wants to expand his operation

Midwest has to offer

An option to buy the airplane a year later (cost of the option

Eagle Airlines owns 3 planes

60% of flights are chartered flights and 40% are scheduled

Cost data Midwest plane:

New engines, FAA maintained

Contains all equipment that Eagle Airline needs

+ The Eagle Airline Case (2)

Dick Carothers wants to expand his operation

Chartered flights: $300 - $400 per hour

The price he is willing to pay

Variables not in control

Carothers could always invest his cash $52,500.

+ Influence Diagram Keputusan Eagle Airline

Problem Identification Level

Problem Structure Level (1)

Problem Structure Level (2)

Problem Structure Level (3)

Problem Structure Level (4)

Using Low Values Using Base Values Using High Values

Is this a worst case best case analysis?

One-Way Sensitivity Analysis (1)

One-Way Sensitivity Analysis (2)

Sensitivity of Profit on Hours Flown

One-Way Sensitivity Analysis (3)

One-Way Sensitivity Analysis (4)

One-Way Sensitivity Analysis (5)

Two-Way Sensitivity Analysis (1)

Two-Way Sensitivity Analysis (2)

Two-Way Sensitivity Analysis (3)

Sensitivity Analysis (4)

Bagaimana menganalisis ketidakpastian yang terdapat pada variabel-variabel

Capacity of Scheduled Flights

Charter price (decision variabel yang ditentukan oleh Carothers)

Changed Influence Diagram

that the problem is simplified, we can include

For example probability distribution of Hours

next step is to asses values to p,q,r, and s.

Now we can create a two way sensitivity graph for q and r.

We write the expected value of purchasing airplane in terms

Decision Tree with 3 Uncertainty Variables

Two-Way Sensitivity Analysis

An investor has funds available to invest in one of three choices:

Two-Way Sensitivity Analysis

Two-Way Sensitivity Analysis

Daerah yang memenuhi

Two-Way Sensitivity Analysis

Two-Way Sensitivity Analysis

+ Two-Way Sensitivity Analysis:

Liedtke is unsure of court probabilities. If Liedtke thinks that p must be

Two-Way Sensitivity Analysis:

Two-Way Sensitivity Analysis:

Two-Way Sensitivity Analysis:

Two-Way Sensitivity Analysis:

Two-Way Sensitivity Analysis:

Two-Way Sensitivity Analysis:

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