This paper discusses the use of global sensitivity analysis (SA) techniques in investment decisions. Global SA complements and improves uncertainty analysis (UA) providing the analyst/decision- maker with information on how uncertainty is apportioned by the uncertain factors. In this work, we introduce global SA in the investment project evaluation realm. We then need to deal with two aspects: (1) the identification of the appropriate global SA method to be used and (2) the interpretation of the results from the decision maker point of view. For task 1, we compare the performance of two family of techniques: non-parametric and variance decomposition based. For task 2, we explore the determination of the cash flow global importance (GI) for valuation criteria utilized in investment project evaluation. For the net present value (NPV), we show that it is possible to derive an analytical expression of the cash flow GI, which is the same for all the techniques. This knowledge enables us to: (1) offer a direct way to compute cash flow GI; (2) illustrate the practical impact of global SA on the information collection process. For the internal rate of return (IRR), we show that the same conclusions cannot be driven. In particular, (a) one has to utilize a numerical approach for the computation of the cash flow influence, since an analytical expression cannot be found and (b) different techniques can produce different ranking. These observations are illustrated by means of the application to a model utilized in the energy sector for the evaluation of projects under survival risk. The quantitative comparison of cash flow ranking with respect to the NPV and IRR concludes the paper, illustrating that information obtained from the SA of the NPV cannot be transferred to the IRR. © 2005 Elsevier B.V. All rights reserved.

Uncertainty and global sensitivity analysis in the evaluation of investment projects

Borgonovo E.;Peccati L.
2006

Abstract

This paper discusses the use of global sensitivity analysis (SA) techniques in investment decisions. Global SA complements and improves uncertainty analysis (UA) providing the analyst/decision- maker with information on how uncertainty is apportioned by the uncertain factors. In this work, we introduce global SA in the investment project evaluation realm. We then need to deal with two aspects: (1) the identification of the appropriate global SA method to be used and (2) the interpretation of the results from the decision maker point of view. For task 1, we compare the performance of two family of techniques: non-parametric and variance decomposition based. For task 2, we explore the determination of the cash flow global importance (GI) for valuation criteria utilized in investment project evaluation. For the net present value (NPV), we show that it is possible to derive an analytical expression of the cash flow GI, which is the same for all the techniques. This knowledge enables us to: (1) offer a direct way to compute cash flow GI; (2) illustrate the practical impact of global SA on the information collection process. For the internal rate of return (IRR), we show that the same conclusions cannot be driven. In particular, (a) one has to utilize a numerical approach for the computation of the cash flow influence, since an analytical expression cannot be found and (b) different techniques can produce different ranking. These observations are illustrated by means of the application to a model utilized in the energy sector for the evaluation of projects under survival risk. The quantitative comparison of cash flow ranking with respect to the NPV and IRR concludes the paper, illustrating that information obtained from the SA of the NPV cannot be transferred to the IRR. © 2005 Elsevier B.V. All rights reserved.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11565/40066
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