...the texts and articles may not represent typical engineering economy practice, they certainly lay the foundation for it. This note summarizes how to construct tornado diagrams in Excel. A template for constructing these diagrams is available from the author at aftge@uaa.alaska.edu.

INTRODUCTION

Sensitivity analysis is needed to address the inherent uncertainty in engineering economy applications because (1) time horizons are measured in years or decades and (2) much economic analysis is done at the feasibility and preliminary design stages. This is often shown using relative sensitivity analysis charts or spiderplots, which have a long and rich history in practice and texts (they are described in 10 of 18 texts reviewed, including Blank and Tarquin (2002), Canada et al. (1996), Eschenbach (2003), Lang and Merino (1993), Park (2002, 2004), Sullivan et al. (2003), Thuesen and Fabrycky (2001), White et al. (1998), Young (1993). Tornado diagrams are not new, but they have not been used nearly as frequently. Only one of the 18 texts included a tornado diagram (Eschenbach, 2003)--material based on this note is included in the PowerPoint slides for instructor use. A review of six volumes of TEE articles (44-49) covered 112 articles, technical notes, and case studies. Many included sensitivity analysis, but there were only two with spiderplots (Miller et al., 2004; Miller and Park, 2004), with both using limits of 4 [+ or -] 75%. One article included a tornado diagram with only positive values (Nembhard et al. (2003), p. 213). This technical note was written to make it as easy to construct tornado diagrams using stacked bar charts as it is to construct spiderplots with a standard x-y plot.

Figure 1 illustrates a typical tornado diagram. These diagrams can be used for any problem where the results can be summarized by a single figure of merit, such as PW, EAC, B/C ratio, IRR, cost/life saved, and design capacity in kilograms or customers or flood volume. The figure of merit is the dependent variable of a model with one to hundreds of "independent" variables. Each of these variables has a base case value and a range of possibilities. The tornado diagram summarizes the impact of each variable on the figure of merit. Typically this analysis assumes that these variables are statistically independent. For graphic impact, the variables are ranked from those that have the most impact (at the top) to those that have the least (at the bottom). Thus, the diagram has the typical funnel shape of a tornado.

[FIGURE 1 OMITTED]

The remainder of this note (1) develops the example with a brief summary of the assumptions underlying the sensitivity analysis, (2) shows how to construct tornado diagrams in the easy...

NOTE: All illustrations and photos have been removed from this article.



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