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An Example of Monte Carlo Sensitivity Analysis

An Example of Monte Carlo Sensitivity Analysis. Mock Seep Tent Example. Benefits and Costs. Suppose benefits of seep tents are: reduced asthma attacks ( a per year at p a per event)….every year for T years. Suppose costs of seep tents are

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An Example of Monte Carlo Sensitivity Analysis

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  1. An Example of Monte Carlo Sensitivity Analysis Mock Seep Tent Example

  2. Benefits and Costs • Suppose benefits of seep tents are: • reduced asthma attacks (a per year at pa per event)….every year for T years. • Suppose costs of seep tents are • One-time costs of C (up front) and ongoing maintenance costs of pm. • Initial parameter values: a=100, pa=$600, C=$100,000, pm=$50,000, T=20, r=0.05.

  3. Net present value • Net present value over a T year planning horizon: • Benefits: Use formula 6 from discounting handout. • Costs: Use formula 6 + C.

  4. An Excel spreadsheet

  5. Cookbook • Define distribution for uncertain parameters (I used ~N(guess, s)) • Run many simulations, obtain NPV each time • Plot histogram of results. • In this case, about a 57% chance NPV>0.

  6. NPV0=24,622

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