W9_Austin_What-if Analysis of Project profitability

[Solving Problem (Sensitivity Analysis) from Skills and Knowledge of Cost Engineering, 5^th Edition. Chapter 31, PP31.1 – PP31.9].

1.   Problem recognition, definition and evaluation

What-if analysis is the substitution of variables in a risk model to test the effects of changes in projects variability. What-if analysis is also referred to as sensitivity analysis. The problem statement is to determine the value with the lowest cost or greatest savings to be selected from possible alternatives.

2.   Development of the feasible alternatives

3.   Development of the outcomes and cash flows for each Alternative

 The simulation output curve indicates the project would vary from $100 million with 10 percent probability to $1400 million with 90% probability.

1.   Selection of the acceptable criteria

What-if sensitivity approach proves successful in making the design process fast-tracked, well structured and transparent. A critical evaluation of the above analysis against its possible alternatives unveils the decisive factors in the choice of acceptable alternative based on both qualitative and quantitative assessments of projects variability. The value with the lowest cost or greatest savings should be given the highest priority.

5. Analysis and Comparison of the alternatives

The use of what-if (sensitivity analysis) as a risk management technique and risk analysis allows projects to proceed on the basis of both qualitative and quantitative assessments of projects variability.

6.   Selection of the preferred alternative

What-if approach proves successful in making the design process fast-tracked, well structured and transparent. A critical evaluation of the analysis against its possible alternatives unveils that the decisive factor is the choice of adopting Project-1 as the best modeling scenario rather than Project-2.

7.   Performance Monitoring and Post Evaluation of Results

As explained in the above what-if simulation, the project cost can vary from $100 to $1400 million and between 10 and 90 percent probability. If the business environment requires greater risk, then the project budget that will be chosen will have a greater chance of variability. For example, in cost terms, one can substitute various quantities and unit costs to test the sensitivity of risk items to changes in projects variability. However, concern would be raised if small changes result in large effects on the costs.

8.   References/Bibliography

1.   Hamilton, Allen C. CCE (2012). Risk Management - what-if analysis. [ONLINE] Available at: http://www.ebay.com/ctg/skills-and-knowledge-cost-engineering-product-education-board-aace-international-a-international-/1286202211.[Last Accessed 18 December 12].

2.   Humphreys & Associates (2012). Introduction Discussion of workshop approach Review of notebook ... Case Study 7: Path analysis using total float ... What-If Analysis .... [ONLINE] Available at: http://www.humphreys-assoc.com/.../project-scheduling-workshop-a...[Last Accessed 18 December 12].

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