Engineering Economic Analysis

328 UNCERTAINTY IN FUTURE EVENTS

o 8

FJGURE .10-9 Graph of 1M values.

Stand-alone simulation programs and commercialspreadsheet add-in packages such

as @Risk and Crystal Ball provide probabilitydistributionfunctions to use for each input

variable. In Example 10-16 the functions RiskUniform and RiskNormal are used. The

packages also collect values for the output variables,such as the IRR for Example 10-16.

In other problems the PW or EUAC could be collected. These values form a probability

distribution for the PW, IRR, or EUAC. Fromthis distribution the simulation package can

calculate the expected return,P(1oss),and the standard deviation of the return.

Example 10-16 uses @Risk to simulate 1000 iterations of PW for the data in Ex-

ample 10-15. A simulation package makes it easy to do more iterations. More important

still, since it is much easier to use different probabilitydistributions and parameters, more

accurate models can be built. Because the modelsare easier to build, they are less likely to

contain errors.

Consider the scale described in Example 10-15. Generate 1000iterations and construct a frequency

distribution for the scale's rate of return.

The first IRR (cell A8) of 14.0t% tgat t~ computed in Figure 10-10 is based on the average bYe

and the average first cost. TheB~cop:d''1RR(cell 1\1.1)bfi.~.Ol%'is comptited by @Risk using :;

the average of each distributjoJ).. Th.e cell content i§ the RATE fOfJ).1ulawith its l~is1<:UmfofJ).1and

."..f!I.

6

5

I

a

4

;>.u

s:::Q)

6- 3

r.x..

2