Breakeven & Sensitivity

Analysis

Group Members
Swaiba Sajid
Bushra Shahzad
Komal Fatima
 The objective is to illustrate breakeven and sensitivity
methods for investigating variability in outcomes of
engineering projects.
 In engineering economy studies ,breakeven and sensitivity
analysis are general methodologies, readily available for
providing information about the potential impact on equivalent
worth due to variability in selected factor estimates.
 Their routine use is fundamental to developing economic
information crucial for decision making.
 BREAK EVEN ANALYSIS

 Break even analysis is concerned with finding the BREAK-EVEN-POINT

 The point at which revenues and costs are exactly equal
 Thus this is a volume of output at which neither a profit is made nor a loss is incurred
 This analysis can be carried out either algebraically or graphically
 When the selection between two engineering project alternatives (or outcomes) is heavily dependent on
a single factor, we can solve for the value of that factor (the break even point)
 In mathematical terms,
 EWA = f1(y) & EWB = f2(y),
 EWA = an equivalent worth calculation of Alternative A;
 EWB = the same equivalent-worth calculation of Alternative B;
 y = a common factor of interest of Alternative A and Alternative B.
 Therefore, the breakeven is the value y
 i.e;
 EWA = EWB, or fl(y) = f2(y), which may be solved for y.
 Consider a hybrid vehicle with a sticker price of $31,500. This vehicle will average 30 miles per
gallon of gasoline. A tax credit of $1,500 for the hybrid vehicle effectively reduces its sticker price to
$30,000. A comparably equipped gasoline-only vehicle will cost $28,000 and will average 25 miles
per gallon of gasoline. Assuming an interest rate of 3% per year and a study period of five years, find
the breakeven cost of gasoline ($/gal) if the vehicle will be driven18,000 miles each year.
 Develop an equivalent-worth equation in terms of the factor of interest—the cost of gasoline
 Develop equivalent uniform annual cost (EUAC) expressions for each of the vehicles.
 Letting X = cost of gasoline, we get the following EUAC equations.
 Hybrid:
 EUACH(3%) = ($31,500 − $1,500)(A/P, 3%, 5)+($X/gal) [(18,000 mi/year)/(30 mi/gal)]
 Gas-only:
 EUACG(3%) = $28,000(A/P, 3%, 5) + ($X/gal)[(18,000 mi/year)/(25 mi/gal)]
 Setting EUACH(3%) = EUACG(3%) and solving for X, we find the breakeven cost of gasoline to be
 X = $3.64/gal
Breakeven Chart for Hybrid versus Gas-Only Vehicle
Sensitivity Analysis
 Sensitivity analysis aanalyzing risks in an engineering projectids us
in
 This kind of analysis is used to explore what happens to a project’s
profitability when the estimated value of study factors are
changed . When small variations in a particular estimate would
change selection of the alternative the decision is sensitive to the
estimate.
 It is used in analyzing project risks by changing the values of key
variables to test what will be the effect of profitability.
 It is also known as “What if analysis” because it answers questions
such as what if incremental analysis are increased or decreased ?
Process of performing sensitivity analysis

 It starts with a base case situation developed by using the

most likely value of the input ( we then change the specified
variable of interest by several specified percentages above
and below the most likely variable holding all other variables
constant)
 Calculate the new net present worth of these new values
(sensitivity graphs)
 The slopes of the graphs in sensitivity will depict how
sensitive the net present worth will be with the change of input
Spreadsheets
 Spreadsheets are very useful in performing sensitivity
analysis.
 Formulas easily reflect changes in parameter values.
 Tables and plots can provide quick answers and visual cues
to the effect of changes
 A spider plot can be especially useful in sensitivity studies.
 It can be useful to examine more than one alternative on a
plot, or to examine sensitivity of incremental cash flows
 Spider graph sensitivity
analysis measures the impact on project
economics as a result of changing one or
more of the parameters within the given
range
Analyzing these impacts can help a mining
company determine, which model inputs
result in the greatest change in the project
economics