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When single factor sensitivity analysis is inadequate to assess the questions which surround the certainty assumptions of a deterministic analysis, risk

Figure 4.10. Sensitivity analysis "spider" graph

analysis techniques can be employed. One approach to risk analysis is the application of probabilistic and statistical concepts to economic analysis. These techniques require information regarding the possible values that uncertain quantities may take on as well as estimates of the probability that the various values will occur. A detailed treatment of this topic is beyond the scope of this chapter. A good discussion of this subject can be found in Park and Sharp-Bette [1990].

A second approach to risk analysis in economic analysis is through the use of simulation techniques and simulation software. Simulation involves using a computer simulation program to sample possible values for the uncertain quantities in an economic analysis and calculating the measure of worth. This process is repeated many times using different samples each time. After many samples have been taken, probability statements regarding the measure of worth may be made. A good discussion of this subject can be found in Park and Sharp-Bette [1990].

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