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Article: A metamodel approach to sensitivity analysis of capital project valuation.
- Article from:
- Engineering Economist
- Article date:
- September 22, 1997
- Author:
CopyrightCOPYRIGHT 1997 Institute of Industrial Engineers, Inc. (IIE). This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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INTRODUCTION
Sensitivity analysis is an important aspect of any engineering economy study. Simply computing traditional project valuation metrics such as net present value (NPV), equivalent annuity (EA), or internal rate of return (IRR) based on a single set of assumptions can be misleading and imprudent. Monte Carlo simulation methods can be helpful in this regard. One can assume that factors such as interest rates, project life, up-front investment or first costs, and salvage value at the end of the project's life are random variates. A probability distribution and its parameters can be specified, and the project value under a variety of conditions can be ...