1. Problem Statement
In this uncertain world we need to make many scenarios if some variable changes which affect to our project results. Continuing from the previous blog cases in blog 6, the actual conditions may vary and influence the economic project’s result. It could be worse or better, so we have to be ready to deal with it. What the effect if one or some variables change in our project assumptions?
2. Development of Feasible Alternatives
According to Sullivan, the method to see the scenario changes if some variables change in our project assumptions is through sensitivity analysis. Sensitivity analysis is the recalculation of the basis in a table. The calculations in the table are the change of each variable assumption while other assumed same (ceteris paribus).
3. Development The Outcomes of Each Alternative
In this sensitivity analysis, we will see the effect of variables of assumptions changes to IRR and NPV. The variables of assumptions basis are:
- Exploration/Sunk Cost
- Capital Investment Cost
- Operating Cost
- Oil Price
- Oil Price Growth
4. Selection of Acceptable Criteria
We will define from the sensitivity graph which the variable will give higher sensitivity to the project’s result IRR and NPV. After that, we should be aware about the risk of the variable assumption if the actual changes are out of our predictions.
5. Analysis of Comparison Between Alternative and Criteria
The assumption of the variables’ changes is from -40% to +40%. This changes will be inputted into our project economic table and the calculation will be the new results.
From the previous blog 6 we have the project economic table as below:
With the changes of the variables we have table of IRR as below:
And the table of NPV as below:
The sensitivity graph of IRR table as follow:
The sensitivity graph of NPV table as follow:
6. Selection of The Best Alternative
From the table and sensitivity graph, we see the oil price has the highest sensitivity which starting from -20% of the previous price basis at US$100/bbl or if the price basis slides down to US$80/bbl, the project becomes uneconomical to the contractor.
7. Follow Up Assessment
The contractor should aware and take careful assumption mostly with the oil price basis, therefore the economic of the contract/project will not turn into disaster.
Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). The Time Value of Money. In Engineering Economy (15th ed., pp. 104-162). Upper Saddle River, N.J: Prentice Hall.
Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Evaluating A Single Project . In Engineering Economy (15th ed., pp. 178-222). Upper Saddle River, N.J: Prentice Hall.
Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Breakeven and Sensitivity Analysis. In Engineering Economy (15th ed., pp. 451-469). Upper Saddle River, N.J: Prentice Hall.