Uncertainty in engineering economy means that:

All outcomes have known probabilities

How does the length of the study period affect uncertainty?

The longer the horizon, the larger the uncertainty

Longer study periods reduce uncertainty

Only short periods are uncertain

Which of these is NOT given as a source of uncertainty?

Certainty of the MARR being fixed by law

Economic conditions such as inflation and exchange rate

Which technique is used to examine how uncertain estimates affect a decision?

Sensitivity analysis, break-even analysis or simulation

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2068 Jestha · 4 marks
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Short note: sources of uncertainty

Short answer

Uncertainty exists when future outcomes cannot be predicted confidently and no reliable probabilities are known. Main sources: estimate inaccuracy, business environment, equipment type, study period length, economic conditions, political/legal factors, natural factors, and MARR selection. Handled via break-even, sensitivity, scenario analysis, expected value, decision trees, and simulation.

Explain the uncertainty and its sources.

Uncertainty exists when the outcome of a future event, or the values to be used in an economic analysis, cannot be predicted with confidence and no reliable probabilities are known. Engineering economy decisions rest on estimates of cash flows, lives and interest rates that will happen in the future, so some uncertainty is always present.

Main sources of uncertainty

Inaccuracy of estimates: first cost, revenues, operating and maintenance costs and salvage value are forecasts, and errors in them change the result. Estimates of new technology are especially weak.
Type of business and its environment: competition, changes in demand, market prices and customer taste change revenues.
Type of physical plant and equipment: the life, breakdown rate and output of equipment may differ from the estimate. New technology can make it obsolete early.
Length of the study period: the longer the horizon, the larger the uncertainty; long-lived projects such as hydropower depend on conditions many years ahead.
Economic conditions: inflation, exchange rate, interest rate and taxes (changes in government policy).
Political and legal factors: policy change, delays in approvals, strikes, and in Nepal, bandhs and changes in regulations.
Natural factors: hydrology, earthquakes, floods and weather affecting construction and operation.
Selection of the MARR: the discount rate used is itself a judgement.

How it is handled

Break-even analysis, sensitivity analysis, scenario analysis, expected value with probabilities, decision trees and simulation are used to examine the effect of uncertain estimates on the decision.

✓ Answer checked by Claude Opus 5.5 (high effort)

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