NPV Sensitivity Analysis: Quiz and Flashcards

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Questions and Answers

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?

Social discount rate analysis

Predicted impacts analysis

Monte Carlo analysis (correct)

Decision trees

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?

All of the above Signup and view all the answers

How does scenario analysis help in decision-making?

By providing insights into different scenarios with varying assumptions Signup and view all the answers

What is the purpose of examining 'optimistic' and 'pessimistic' assumptions in scenario analysis?

To understand the implications of extreme situations Signup and view all the answers

What is the fifth task when predicting impacts quantitatively over the life of a project?

Predicting all impacts over time for each alternative Signup and view all the answers

What is one major challenge faced by analysts when predicting impacts quantitatively?

Dealing with considerable uncertainty Signup and view all the answers

In the provided example, what types of road users were observed on the Coquihalla?

Truck drivers, drivers or passengers in cars on business, and drivers or passengers in cars on vacation Signup and view all the answers

What potential issue may arise if the conviction rate is increasing while there is no change in the actual crime rate?

There could be an overestimation of crime reduction due to policy intervention Signup and view all the answers

What is one way an analyst may estimate changes in crime when direct measurement is not feasible?

Estimating changes in arrest rates Signup and view all the answers

How can analysts handle uncertainty when predicting impacts over time?

By determining the most likely impact for each time period Signup and view all the answers

What does CBA require analysts to do explicitly?

Identify impacts that different groups view in opposing directions. Signup and view all the answers

Why is it more informative to have two impact categories in the flooding example provided?

To show the differing perceptions of residents and duck hunters. Signup and view all the answers

In CBA, the choice of metric often depends on what factors?

Data availability and ease of monetization. Signup and view all the answers

Which factor might influence the choice of metric if automobile emissions were considered as an impact?

Tons of various pollutants or health effects. Signup and view all the answers

Why might including environmental impacts make the choice of metrics less straightforward?

Environmental impacts are difficult to quantify. Signup and view all the answers

What does sensitivity analysis help with in CBA?

Examining how changing assumptions affect results. Signup and view all the answers

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.

Sensitivity Analysis in NPV Evaluation

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