CDA / ESM Comparative Decision Analysis & Economic Safety Margin
Jul 13th, 2009
The Comparative Decision Analysis Economic Safety Margin CDA / ESM™ methodology has been developed by Riskope International and is used to compare project alternatives in financial terms, including:
- life’s cycle balance including internal and external risks over a duration selected by the client,
- project implementation and demobilization costs and risks.
The methodology is a vital element of a Risk Based Decision Making (RBDM) approach in alternative / project / investment selection based on solid economic concepts, exempt of the well know NPV (Net Present Value) pitfalls.
Figure 1. For each analysis: min, max, average of the cumulative cost at forty years
Comparative Decision Analysis Economic Safety Margin (CDA) and (ESM)
The techniques have been the object of courses and seminars to industrialists and large corporate clients all over the world in the last years. Web based courses are available on Edumine.com:
- Course by Cesar and Franco Oboni: Risk and Decision Making Participants who successfully complete this course and the certification requirements will be able to perform the following.
Discuss new approaches to risk assessment and
decision making, such as Economic Safety Margin and
Comparative Risk Based Decision Making
and their application in practice.
Discuss ways to recognize common risk exposures, and
quantification techniques for evaluation of subjective probabilities.
- Course by Cesar and Franco Oboni: Engineering for Success in Mining Participants who successfully complete this course and the certification requirements will be able to perform the following.
Understand and apply the tools and methods available for
evaluating, planning and preparing for crises.
Understand the principles of Process Safety Management (PSM) and
their application to industrial processes.
Understand the principles of quantitative analysis of risk and
their application to Risk Based Decision Making (RBDM).
What can CDA / ESM do for you?
CDA / ESM simulates the life of a corporation or a project from a selected initial stage (for example starting at construction/implementation, or acquisition, or sale, etc.) for a number of years selected by the client.
The calculations are all probabilistic and consider income, expenses, financial costs (interests and amortizations), as well as internal and external risks from cradle to grave. During the simulation the yearly balance of the project/corporation is evaluated together with the probability that the project/corporation brings in positive results, commercial financing are sufficient and their amortization is possible. If reclamation/demolition bonds have to be paid, then their payment is also taken into account. It can be said that CDA / ESM are tools to ensure that the Corporate Risk Acceptability Profile is complied with, as their results can be compared year after years to the risk tolerance and risk appetite of the corporation.
CDA will take into account the risks of each alternative and give a realistic evaluation of the lng term results, including the years that “vanish” when using a discounted evaluation method. Contrary to NPV which at best includes risks as an after though, by including in the year by year analysis all the identified risks, CDA allows to properly weight the pros and cons of each alternative. CDA can be performed on elements of the project(s), or for the whole project.
In order to perform the CDA data on expenditures and incomes, including their expected variability, evaluation of the risks, etc. are needed. It is also necessary to include forecasts and variability of the income, and it is possible to simulate various income models. The result is a simulated probabilistic balance sheet over the life of the project that allows the determination of the cumulated economic results of the project(s), the probability of loss in any given year, and even the situation at closure.
If the life of the project greatly exceeds the “vanishing point” generated by the NPV, it is likely that the results of the CDA evaluation will greatly exceed the ones delivered by a NPV approach, unless the risks create a serious negative potential outcome; thus, it is also very likely that the early years of the operation will have worse results than normally anticipated by a standard NPV approach.
How can you use CDA / ESM ?
Riskope International proposes to all their clients to use Comparative Decision Analysis and Economic Safety Margin (CDA / ESM) , and keeps developing the methodology thanks to forever new applications requested by variety of industries the company advices.
Tagged with: Acceptability, alternative, Analysis, assessment, Comparative, corporate, decision, economic, making, management, Margin, Net, NPV, operational, Present, Profile, projects, Reliability, risk, Safety, sustainability, tolerance, Value
Category: Consequences, Hazard, Probabilities, Risk analysis, Risk management, Tolerance/Acceptability