Project Development and Optimisation: Sensitivity Analysis

This document discusses sensitivity analysis in project development and optimisation. It explains the concept, parameters, different scenarios based on economic analysis, and the due diligence process. It also provides examples and benefits of sensitivity analysis.

Running head: PROJECT DEVELOPMENT AND OPTIMISATION
PROJECT DEVELOPMENT AND OPTIMISATION: Sensitivity Analysis
Name of the Student:
Name of the University:
Author Note:

1PROJECT DEVELOPMENT AND OPTIMISATION
Table of Contents
Introduction................................................................................................................................2
Sensitivity analysis.....................................................................................................................2
Justification of the Parameters...................................................................................................4
Different Scenario based on the economic analysis...................................................................6
Due Diligence Process...............................................................................................................9
Scope of the Due Diligence Process........................................................................................11
Information Needs....................................................................................................................12
Conclusion................................................................................................................................12
References................................................................................................................................13

2PROJECT DEVELOPMENT AND OPTIMISATION
Introduction
Sensitivity Analysis is a modelling tool which is utilized in financial department to
study the affect of the various set of independent variables on a particular dependent variable
considering some specific condition. It is used in various fields like geography, biology,
engineering and economics. It is basically used in the analysis of “Black Box Process” where
the outcome is the opaque function of the inputs. An opaque function is such type of function
where the process is not analyses or studied due to certain reasons like, climatic conditions in
geography are too complex due to which the association between the input and the out is not
realized. It helps in locating the main variables which are playing a significant role in cost
and benefits of the project which includes operating costs, legal costs, expenses, revenues,
demands and financial benefits. The report mainly focuses on the project development and
optimisation with respect to the sensitivity analysis and the due diligence process. The report
briefly describes about the sensitivity analysis, parameters used in such kind of analysis,
various scenarios based on the economic analysis, due diligence process, Scope of the due
diligence process and the information needs of the stakeholders, project sponsors and others.
Sensitivity analysis
The environment of every business is too unstable. It changes or fluctuates quickly
which can damage the business in large amount. The unstable factors of the business are the
external factors of the business like change in sales which can decrease the sales of the
business and the organization can suffer a huge loss (Björkdahl and Holmén 2013). These
external factors should be analysed or studied in a regular way by the organizations. Regular
analysis of the external factors of the business can prevent the company from such type of
losses. To analyse such type of external factors, the sensitivity analysis is used which finds

3PROJECT DEVELOPMENT AND OPTIMISATION
the fluctuations in the quantifiable variable of the project (Tavakoli, Mousavi and Broomhead
2013).
The purpose of the sensitivity analysis are as follows:
S.L no. Description
1 Decision Making
1.1 Locating the sensitive information
1.2 Finding the critical information, break-down or the threshold values
1.3 Checking the robustness of the solution
1.4 Determining the sub-optimal explanations
1.5 Innovating some elastic references dependent based on the situations.
1.6 Relating the easy and complex worths
1.7 Evaluating risk of project
2 Communication
2.1 Recommends more compelling, credible and understandable points.
2.2 Allow the decision makers in selecting the assumptions
2.3 Delivering the due of assurance in a technique
3 System Quantification
3.1 Determining the relation in between the inputs and the outputs
3.2 Determining the hypothesis of the purpose of testing
4 Project Development
4.1 Project Testing for accurateness
4.2 Identifying the mistakes in the project
4.3 Shortening the Project

4PROJECT DEVELOPMENT AND OPTIMISATION
4.4 Standardizing the project
4.5 Investing the missing data
4.6 Prioritising the acquisition of the information.
Table 1: Advantages of the Sensitivity Analysis
(Sensitivity analysis)
Sensitivity analysis tool is used for evaluating the way in which the values of set of
the independent variables affects the particular dependent variables in association with
particular conditions. Generally the sensitivity analysis is used for various fields. In the given
case it is used for measuring the sensitivity of revenue with regard to the changes in cost of
goods sold. It can be recognized that with increase in COGS, sales revenue is going down and
on the contrary, with the reduction in COGS the sales revenue is going up. For instance, it
can be recognized that when the COGS is 10% the initial sales revenue is amounting to
116,729.76. However, when the COGS is 2.50%, the initial sales revenue is amounting to
178,272.74. Hence, it can be stated that the COGS and sales revenue are in inverse
relationship that is with increase of COGS, sales revenue will be reduced and with the
reduction COGS, the sale revenue will go up.

5PROJECT DEVELOPMENT AND OPTIMISATION
Justification of the Parameters
The sensitivity analysis of a project follows the principle of “Change the project
attributes and observe the respective behaviour” (Lin et al. 2013). There are basically four
parameters to change and observe in the project. They are as follows:
What to Vary: The project officials can change any or all the following factors like (Imai
and Yamamoto 2013):
 Influence of an operation to the model objective.
 The model objective (instead of maximise the profit minimize the threat of
the projects)
 The total number of constraints
 The total number of operations
 Technical parameters.
This approach mainly deals with the variation in the worth of the mathematical
parameter in various levels. In the project some situations are also analysed like:
 If the government tries to prohibit the specific technology for some
environmental issues.
 If an innovative freeway was built across the two main centres.
 If an innovative input having unique properties is available.
The output model is then compared with the original one and the revised model can
be utilized in the sensitivity analysis of the uncertain parameters to locate the vast
implications of the variations in the project.
What to Observe: According to the variations made in the system, particular part of the
system is analysed or observed. The observation is done on the basis of the original one and

6PROJECT DEVELOPMENT AND OPTIMISATION
the resultant one after the variations have been made (Gramacy, Taddy and Wild 2013).
Some part of the system that are to be analysed after applying the variations are like:
 The worth of the project objective method in the optimal strategy (example: strategies
that are optimal in other scenarios or a specific strategy defined by decision maker)
 Variance analysis in the objective method between the two techniques (example:
between optimal strategy as well as a specific strategy proposed by decision maker)
 The worth of objective method of optimal strategy.
 The worth of the decision variables
 The worth of constraint slacks and shadow costs in the optimisation model.
 The rankings of the shadow costs and the decision variables.
Experimental Design: It is mixture of parameters that would be alternated. The modeller
should determine whether to vary all the parameters at a time keeping the other values at the
base level or to determine the combination of variations in the project (Paasch, Khalili and
Bonaventure 2013). The basic problem regarding this approach is that if two parameters are
positively correlated then they would take relatively great values and if the two parameters
are negatively correlated then one of the parameters would have low value while other will
have a greater value. In the selection process of the parameters, a usual appropriate approach
is utilized to define the rate in advance. The levels that are nominated for every parameter
should cover the range of the likely output of that item (Cortez and Embrechts 2013). For
analysing combination of variations, an effective approach is used known as “Complete
factorial” experimental design. Combination of variations includes many complex methods
like if eight parameters are to be analysed five levels require 390,625 solutions. If one
solution consumes one minute to get executed then the task would be completed in nine
months, also the volume required is vast. In this case, the number of variables is reduced to
avoid such type of complexity. The preliminary sensitive analysis is used to determine which

7PROJECT DEVELOPMENT AND OPTIMISATION
parameters must be included in the complete factorial experimental design (Moazen,
Costantini and Bruner 2013).
Different Scenario based on the economic analysis
Economic analysis is basically carried out to prove that the investment done of the
company is used or utilized prudently. The economic analysis mainly focuses on the cost
effectiveness of the system. It represents the benefits of the new or innovated system over the
existing one. Basically, the benefit analysis for the project focuses on reducing the cost of the
projects (Bauer 2013). Reductions can be done with respect to capital costs, continuing costs,
designing costs, utilities costs, leasing costs and equipment replacement cost and
maintenance cost of the equipment. There are various techniques in the economic analysis
like net present value, Benefit-Cost as well as the Incremental Benefit-Cost Study, Utility
Cost analysis, Value engineering (Krutilla and Eckstein 2013.). The examples are stated
below:

8PROJECT DEVELOPMENT AND OPTIMISATION
Alternative Capital Cost ($) Annual
Maintenance
Cost ($)
Maintenance
Net present
value ($)
Total net
Present
Value ($)
Twisted Wire Pair (TWP)
Prep: 62400@$3
Cable:76,000@$1
2,000@$2
1,600@$1.50
RCU: 196@$1,200
Conduit: 15,600@$50
Modems 33@$180
Total NPW
187,200
76,000
5,000
2,400
235,200
780,00
5,940
1,291,740
0
3,800
250
120
23,520
39,000
594
0
35,808
2,356
1,131
221,631
367,501
5,597
634,024 1,925,764
Leased Telephone Lines
(TELCO)
Annual lease Charges:
Cable: 3,920@$1.80
3,920@$3.30
RCU: 196@$1,200
Conduit: 3,920 @$50
Modems: 33@$180
Other: 196@$143
Total NPW
0
7,056
12,936
235,200
196,000
5,940
28,028
485,160
138,336
353
647
23,520
9,800
594
0
1,303,553
3,326
6,096
221,631
92,346
5,596
0
1,632,548 2,177,708
Fibreoptic Lines
Prep: 62,400@$3
Conduit: 15,600@$50
Modems: 33@$415
RCU: 196@$1500
Cable: 78,000@$3
Total NPW
187,200
780,000
13,695
294,000
234,000
1,508,895
0
39,000
1,370
29,400
11,700
0
367,501
12,910
277,039
1010,250
767,700 2,276,595
Table 2: Example of Net present worth evaluation
(Source: C:DATAFREEMANG.HBKCD-ROMMOD11CD.WPD 2019)

9PROJECT DEVELOPMENT AND OPTIMISATION
Benefits and Costs (in million dollars)
LRT HWY TDM TSM HOV
Benefits
User
External
Emissions
Revenues
TOTAL
20.6
5.7
1.9
2.5
30.7
22.5
-21.0
-0.9
0.0
0.6
-16.6
33.1
5.0
33.1
44.2
21.8
2.0
0.6
0.0
24.4
24.1
4.3
2.3
0.0
30.6
Costs 48.1 4.7 14.7 5.9 8.0
B/C ratio 0.64 0.12 3.01 4.14 3.45
Table 3: Example of benefit cost analysis
(Source: C:DATAFREEMANG.HBKCD-ROMMOD11CD.WPD 2019)

10PROJECT DEVELOPMENT AND OPTIMISATION
Figure 1: Example of Utility Cost Analysis
(Source: C:DATAFREEMANG.HBKCD-ROMMOD11CD.WPD 2019)
Due Diligence Process
It is the important stage of the dead life cycle where the target makes all available in
the legal, financial and other relevant information for the purpose of evaluation of the
financial organization and also its value (Fasterling and Demuijnck 2013). The process
includes refinancing, public listing, restricting, acquisition and investment. The main purpose
of due diligence is to raise the acquirer’s understanding with respect to the key information
that are supporting the transaction. It helps the organization to understand the conduction of
the Target in their premises. The process provides a detailed study regarding the culture,

11PROJECT DEVELOPMENT AND OPTIMISATION
human resources, operations, competitive positioning, future outlook and the customer
relationships (McLaughlin and Pavelka 2013). A successful due diligence process consists of
three main pillars like Risk reduction, strategic rationale, post diligence techniques.
Strategic Rationale Risk Reduction Post Diligence
Transaction rationale Financials Countermeasures
Market Attractiveness Tax Revise Valuation
Value Creation Potential Legal Issues Transaction Documentation
Integration Enablers IT operations Assess Risk
Competitive Positioning Human Resources Go/No Go
Table 4: Three pillars of Due Diligence
Figure 2: The Deal Life Cycle

12PROJECT DEVELOPMENT AND OPTIMISATION
(Source: midaxo 2019)
Scope of the Due Diligence Process
The company requiring the due diligence of the target should be mindful of the
benefits expected from the process, the external areas to be covered by the process and the
areas that the organization will cover by in house resources, this is known as the scope of the
due diligence process (Yan and Guoqiang 2013). The fundamental issues in scoping a due
diligence process are:
 Communication: The transaction should not be hampered due to misunderstanding
or the respective communication barriers.
 Public holidays and the timezone differences: If the transaction is hampered then
there should be other end which will be recovering the transaction.
 Confidentiality: The key officials should be involved in the target to avoid delays.
 Limited access to targets: The scope should be limited to prevent it from the
competitors.
The scope of the due diligence might be less due to (Harrison 2013):
 The target is in the strong financial position.
 The target is providing assurances.
 The transaction displays the purchase of an assets
The scope of the process might be high due to (Colak et al. 2013):
 The target is not in the strong financial position
 The Target is not providing the extensive representations
 The transaction is the share purchase or asset purchase.

13PROJECT DEVELOPMENT AND OPTIMISATION
Information Needs
The main motive of the owner is to assess the returns of the investment made by them
in the financial firm. The requirements of the owner are the regular financial records of the
organization. The competitors of a particular firm want the information regarding the rival’s
financial statement which will help them to compete in this competitive market (Mehta et al.
2013). The customer requires the information regarding the product produced by the
organization. The organization officials should deliver relevant and important information
regarding their products to the clients. The employees should be informed about their
responsibilities in the operation and the they should be always kept motivated to increase the
profit of the business. Suppliers need the financial statement to take decisions regarding the
safety to extend the credit to the company.
Conclusion
Therefore, it is concluded that the sensitive analysis is an effective tool utilized by the
finance department of any organization to focus on their operations and their products. The
due diligence process is also an effective and efficient process to help the organization to
mitigate the risk of the organization. The report also stated the scope of the due diligence
process. The report also describes about the information needed by the stakeholders of the
business. The sensitivity analysis also helps the organization to take quick effective decisions.
As discussed, the external factors of the business are complex, so every organization needs to
implement the sensitivity analysis.

14PROJECT DEVELOPMENT AND OPTIMISATION
References
Bauer, P., 2013. Economic analysis and policy in underdeveloped countries. Routledge.
Björkdahl, J. and Holmén, M., 2013. Business model innovation–the challenges ahead.
International Journal of Product Development, 18(3/4), pp.213-225.
C:DATAFREEMANG.HBKCD-ROMMOD11CD.WPD. [ebook] library.unt, p.20.
Colak, M., Cetin, T., Yilmaz, S., Yildiz, T. and Korkmaz, Y., 2013. Furniture industry in
Turkey due to product and process additional work or the scope of the method. Asian
Economic and Financial Review, 3(7), p.817.
Cortez, P. and Embrechts, M.J., 2013. Using sensitivity analysis and visualization techniques
to open black box data mining models. Information Sciences, 225, pp.1-17.
Fasterling, B. and Demuijnck, G., 2013. Human rights in the void? Due diligence in the UN
guiding principles on business and human rights. Journal of Business Ethics, 116(4), pp.799-
814.
Gramacy, R.B., Taddy, M. and Wild, S.M., 2013. Variable selection and sensitivity analysis
using dynamic trees, with an application to computer code performance tuning. The Annals
of Applied Statistics, 7(1), pp.51-80.
Harrison, J., 2013. Establishing a meaningful human rights due diligence process for
corporations: learning from experience of human rights impact assessment. Impact
Assessment and Project Appraisal, 31(2), pp.107-117.
Imai, K. and Yamamoto, T., 2013. Identification and sensitivity analysis for multiple causal
mechanisms: Revisiting evidence from framing experiments. Political Analysis, 21(2),
pp.141-171.

15PROJECT DEVELOPMENT AND OPTIMISATION
Krutilla, J.V. and Eckstein, O., 2013. Multiple Purpose River Development: Studies in
Applied Economic Analysis. RFF Press.
Lin, X., Zhang, C., Huang, Y., Zhu, Z., Chen, X. and Yang, C.J., 2013. Backbone-modified
molecular beacons for highly sensitive and selective detection of microRNAs based on
duplex specific nuclease signal amplification. Chemical Communications, 49(65), pp.7243-
7245.
McLaughlin, J.S. and Pavelka, D., 2013. The Use Of Customer Due Diligence to Combat
Money Laundering. Accountancy Business and Public Interest, pp.57-84.
Mehta, V.M., Knutson, C.L., Rosenberg, N.J., Olsen, J.R., Wall, N.A., Bernadt, T.K. and
Hayes, M.J., 2013. Decadal climate information needs of stakeholders for decision support in
water and agriculture production sectors: A case study in the Missouri River Basin. Weather,
Climate, and Society, 5(1), pp.27-42.
midaxo (2019). M&A Due Diligence Guide.pdf. [ebook] midaxo, p.20.
Moazen, M., Costantini, D. and Bruner, E., 2013. A Sensitivity Analysis to the Role of the
Fronto‐Parietal Suture in Lacerta Bilineata: A Preliminary Finite Element Study. The
Anatomical Record, 296(2), pp.198-209.
Paasch, C., Khalili, R. and Bonaventure, O., 2013, December. On the benefits of applying
experimental design to improve multipath TCP. In Proceedings of the ninth ACM conference
on Emerging networking experiments and technologies (pp. 393-398). ACM.
Tavakoli, S., Mousavi, A. and Broomhead, P., 2013. Event tracking for real-time unaware
sensitivity analysis (EventTracker). IEEE Transactions on Knowledge and Data Engineering,
25(2), pp.348-359.

16PROJECT DEVELOPMENT AND OPTIMISATION
Yan, H. and Guoqiang, L., 2013. Due diligence in merger and acquisition--with China
practice view. International Journal of Business and Social Science, 4(4).