Modeling Decisions

SENSITIVITY ANALYSIS

Rahmi Yuniarti
PSTI-UB

Introduction
Purpose 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:
Identify the important variables through Tornado
Diagrams
Identify interaction effects between important
variables
Identify the importance of probability assessments
(which are also variables)

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The Eagle Airline Case

Dick Carothers wants to expand his operation
Piper Seneca has to offer
An airplane @ price $95,000
(He can probably by the plane for $85,000 - $90,000)
An option to buy the airplane in a year
(Cost of the option $2,500 - $4,000)

Currently
Eagle Airlines (=Dick Carothers) owns 3 planes
50% of flights are chartered flights and 50% are
scheduled

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The Eagle Airline Case

Cost data Seneca plane:
New engines, FAA maintained
Contains all equipment that Eagle Airline needs
Has 5 seats for passangers and pilot plus room for baggage
Operating cost $245 per hour including fuel, maintenance and
pilot salary
Annual fixed cost $20,000 (=yearly insurance) + Finance charges
Finance charges:
Borrow 40% of the price at 2% above the prime rate (=9,5%, but
subject to change)
Revenue data
Chartered flights: $300 - $350 per hour
Scheduled flights: $100 per person per hours, planes are on
average 50% full
Expected number of hours flown with new plane 800-1000 per
year
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The Eagle Airline Case

Variables in control
The price he is willing to pay
The amount finance

Variables not in control

Insurance cost
Operation cost and so on
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?

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Influence Diagram Keputusan Eagle Airline

Gambar di bawah adalah Initial Influence Diagram

Charter Price
Ticket Price

Proportion
Financed

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Purchase
Seneca?

Problem Identification Level

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Problem Structure Level

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Problem Structure Level

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Problem Structure Level

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Problem Structure Level

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

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Base

High

500
$300.00
95
$0.40
0,4
0.45
$230.00
18000
$0.30
0.105
$85,000.00

800
$325.00
100
$0.50
0,5
0.5
$245.00
20000
$0.40
0.115
$87,500.00

1000
$350.00
108
$0.60
0,6
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

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One-Way Sensitivity Analysis

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One-Way Sensitivity Analysis

Sensitivity of Profit on Hours Flown
(Keeping Everything Else Fixed)
$35.000,00
$30.000,00
$25.000,00

Purchase
Seneca

$20.000,00

Profit

$15.000,00
$10.000,00
$5.000,00

Money
Market
$4,200

$0,00
-$5.000,00
-$10.000,00
-$15.000,00
500

550

600

664,2

650

700

750

800

850

900

950

1000

Hours Flown
Hours Flown

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Money Market

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One-Way Sensitivity Analysis

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%

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-40%

-30%

-20%

-10%

0%

10%

20%

30%

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One-Way Sensitivity Analysis

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

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
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One-Way Sensitivity Analysis:

Tornado Diagram

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Two-Way Sensitivity Analysis

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Two-Way Sensitivity Analysis

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Two-Way Sensitivity Analysis

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Two-Way Sensitivity Analysis

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Sensitivity to Probability
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: Carothers menetapkan 2 nilai untuk masing-masing
variabel yang menjelaskan kondisi optimis dan pesimis

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Influence Diagram untuk Analisis

Sensitivitas terhadap Probabilitas

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Decision Tree with 3 Uncertainty Variables

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Decision Tree with 3 Uncertainty Variables

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 To create the graph, write out the expected value of

purchasing the airplane in terms of q and r.
This equation comes from solving the decision tree:

EMV (Purchase) = 0.5{q [-9725r - 4225(1-r)] + (1-q)

[6525(0.8r) + 18275(1-0.8r)]} +
0.5{q [675r + 10175(1-r)] + (1-q)
[16925(0.8r) + 32675(1-0.8r)]}
After algebraic reduction, this expresion becomes :

EMV (Purchase) = q (3500r - 22500) -11000r + 25475

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 Purchase the airplane if EMV(Purchase) > 4200 ;

q (3500r - 22500) -11000r + 25475 > 4200
25475 4200 -11000r > q (22500 - 3500r)

This inequality reduces to :

21275 11000r
q
22500 3500r

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Decision Tree with 3 Uncertainty Variables

Rectangle A :
q : 0.4 0.5
r : 0.5 0.65

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