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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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benefits and costs
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.
net present value
Net present value
  • Net present value over a T year planning horizon:
    • Benefits: Use formula 6 from discounting handout.
    • Costs: Use formula 6 + C.
cookbook
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.