Conservative Estimating, Breakeven Analysis, and Sensitivity Analysis

This chapter and the rest of Part 3 describe techniques that can be used with capital budgeting methods to treat uncertainty and risk in project evaluation. We examine techniques that use single-value, multiple-value, and probability function estimates of input data and measures of worth. The techniques are generally in order of increasing complexity in Chapters 15 through 17. The set of techniques in any given chapter, however, tends to require a similar level of technical sophistication except for Chapter 17, where we include some less often used techniques that vary in complexity. We describe advantages and disadvantages of each technique and the extent to which each accounts for risk exposure and risk attitude. Chapter 18 treats in detail how to select the best technique for handling uncertainty and risk in evaluating an investment.