Podcast
Questions and Answers
What is the purpose of sensitivity analysis?
What is the purpose of sensitivity analysis?
- To predict future values based on certain assumptions
- To determine the appropriate social discount rate
- To understand uncertainties by showing the values of parameters that could change recommendations (correct)
- To examine different scenarios with optimistic and pessimistic assumptions
Which method mentioned in the text helps in obtaining a better understanding of the distribution of estimated NPV?
Which method mentioned in the text helps in obtaining a better understanding of the distribution of estimated NPV?
- Social discount rate analysis
- Predicted impacts analysis
- Monte Carlo analysis (correct)
- Decision trees
In sensitivity analysis with only one alternative, what does it show?
In sensitivity analysis with only one alternative, what does it show?
- Most likely scenarios
- Values of parameters that could change the recommendation (correct)
- Pessimistic assumptions
- Optimistic assumptions
What is a key area of uncertainty that an analyst may encounter during sensitivity analysis?
What is a key area of uncertainty that an analyst may encounter during sensitivity analysis?
How does scenario analysis help in decision-making?
How does scenario analysis help in decision-making?
What is the purpose of examining 'optimistic' and 'pessimistic' assumptions in scenario analysis?
What is the purpose of examining 'optimistic' and 'pessimistic' assumptions in scenario analysis?
What is the fifth task when predicting impacts quantitatively over the life of a project?
What is the fifth task when predicting impacts quantitatively over the life of a project?
What is one major challenge faced by analysts when predicting impacts quantitatively?
What is one major challenge faced by analysts when predicting impacts quantitatively?
In the provided example, what types of road users were observed on the Coquihalla?
In the provided example, what types of road users were observed on the Coquihalla?
What potential issue may arise if the conviction rate is increasing while there is no change in the actual crime rate?
What potential issue may arise if the conviction rate is increasing while there is no change in the actual crime rate?
What is one way an analyst may estimate changes in crime when direct measurement is not feasible?
What is one way an analyst may estimate changes in crime when direct measurement is not feasible?
How can analysts handle uncertainty when predicting impacts over time?
How can analysts handle uncertainty when predicting impacts over time?
What does CBA require analysts to do explicitly?
What does CBA require analysts to do explicitly?
Why is it more informative to have two impact categories in the flooding example provided?
Why is it more informative to have two impact categories in the flooding example provided?
In CBA, the choice of metric often depends on what factors?
In CBA, the choice of metric often depends on what factors?
Which factor might influence the choice of metric if automobile emissions were considered as an impact?
Which factor might influence the choice of metric if automobile emissions were considered as an impact?
Why might including environmental impacts make the choice of metrics less straightforward?
Why might including environmental impacts make the choice of metrics less straightforward?
What does sensitivity analysis help with in CBA?
What does sensitivity analysis help with in CBA?
Study Notes
Cost-Benefit Analysis
- If no NPV is positive, the current policy should remain in place.
Sensitivity Analysis
- Sensitivity analysis examines the values of a parameter that would change the recommendation from “go” to “no go,” or vice versa.
- Analysts might examine different scenarios, such as “most likely,” “optimistic,” and “pessimistic” assumptions.
- Decision trees or Monte Carlo analysis can be used to obtain a better understanding of the distribution of the estimated NPV.
Making a Recommendation
- When faced with two alternatives, an analyst should make a recommendation based on the predicted impacts of each.
- Surrogate indicators, such as changes in arrest rates or conviction rates, can be used to estimate changes in crime, but may involve some loss of information.
Predicting Impacts
- Predicting impacts involves quantifying the incremental impacts of the project relative to the current policy for each alternative.
- Analysts should predict the impacts in each year during the discount period (the life of the project) for each alternative.
- Uncertainty is inherent in making these predictions, and analysts may determine the “most likely” impact in each time period or the expected impact in each period.
Identifying Impacts
- Analysts should identify explicitly the ways in which the project would make some individuals better off, such as improved skills, better education, or higher incomes.
- Analysts should be on the lookout for impacts that different groups of people view in opposing directions.
- Impacts should be categorized and monetized, and the choice of metrics depends on data availability and the ease of monetization.
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Description
Learn about sensitivity analysis in NPV evaluation and how to determine if specified alternatives are superior to the current policy. Understand the importance of predicting values based on assumptions and dealing with uncertainties in impact prediction and monetary valuation.
