![]() The SMT and rapid CBA template (see Part F3 of the ATAP Guidelines) requires proponents to address a series of questions about the risks of their proposed initiatives. ![]() 11.2 Decide on the level of detail for a risk analysis Present the results in terms of percentage and/or absolute deviations in NPV and BCR in a table. Group the list of parameters likely to be tested in an easily accessed part of the spreadsheet (for example, the upper left corner). Spreadsheets are ideally suited to conducting sensitivity tests. road shape correction, resealing) are generally more accurate than those for larger initiatives (e.g. Costing for more routine initiatives (e.g. The range of values relates to different types of initiative. The final costing relates to estimates after the final design stages.ī. The appropriate range for capital costs depends on the detail of investigations, designs and costing.The concept estimate relates to initial pre-feasibility or sketch-planning estimates. Traffic diverted or generated by the initiativeĪ. Traffic generated by specific (uncertain) developments ![]() Road-agency operating and maintenance costs Table 3: Sensitivity variables and ranges recommended by Austroads VARIABLEĬapital cost aConcept estimateDetailed costingFinal costing The amounts the variables change by do not have to be symmetrical.Īs an example, Table 3 shows the sensitivity ranges for road initiatives recommended by Austroads. It may be worthwhile to expend more resources to obtain a better estimate of the variable, though this will do nothing to reduce risk arising from inherent volatility of the variable.Ĭhoose the percentage variations used for sensitivity tests, bearing in mind the range of plausible values that a variable can take. Conversely, if the affect on NPV is large in percentage terms, the robustness of the CBA can be called into question. Â☑0 per cent change causes a Â☓ per cent change in NPV), it implies that the uncertainty surrounding the variable is not very important and is not critical to decision-making. If the NPV changes by only a small amount (e.g. In its most basic form, it involves changing one variable at a time by a standard percentage, say, +10 per cent followed by –10 per cent, or by an absolute amount to gauge how much NPV changes. Sensitivity analysis is a simple way to analyse the uncertainty surrounding CBA results, but it is a limited tool. 11.1 Undertake simple sensitivity analyses See NGTSM 2006 Volume 5, Section 2.11 or BTRE (2005) for an explanation. It is not good practice to add a risk premium to the discount rate for CBAs. It is not a mechanism to offset optimism bias in financial calculations. It compensates lenders and shareholders for bearing the risk that the firm will go bankrupt. See NGTSM Volume 5, Section 2.11 or BTRE (2005) for an explanation.įor financial analyses, the weighted average cost of capital will include a risk premium. In most cases, pure risk can be ignored in CBAs. If downside risk has been eliminated from projections, the remaining variation about the expected value is called pure risk. Downside risk arises because people usually do not to consider what can go wrong, causing assessments to be biased in favour of the initiative. Risk and uncertainty arise from the possibility that a forecast will prove to be wrong.ĭistinguish between downside risk and pure risk. 11.1 Undertake simple sensitivity analyses.ġ1.2 Decide on the level of detail for a risk analysis.ġ1.3 Identify risky variables and sources of risk.ġ1.4 Assign alternative values to risky variables.ġ1.6 Identify states of nature and associated probabilities.ġ1.7 Calculate expected values of CBA results.ġ1.8 Calculate probability-based values of investment costs if required.ġ1.9 Use a computer program if the analysis becomes too complicated.ġ1.10 Consider risk management strategies.Īll benefits and costs that go into a CBA are forecasts of the future.
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