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Sensitivity Analysis: Weather Prediction

Consider the following problem:

The Smith family annual reunion is to be held on the first Saturday in May. There is a probability of cool or rainy weather on that day. The family has reserved free space at a local park for their event. For an additional charge, one of the pavilions that will provide shelter can be rented. If the weather is bad and the shelter is not rented, then the event may need to be canceled and family members will have spent the money for travel and preparations needlessly. Should the family spend the extra money to rent the shelter, even though it may not be needed?

Perform a sensitivity analysis for the above problem. Include the following details in your paper:

•One parameter sensitivity analysis

•Identify how the best alternative and expected payoff change as the variable changes

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Solution Preview

A sensitivity analysis attempts to identify variables which may affect the final outcome of a given situation. In this case, the most visible variable is the weather. Because there is a probability of inclement weather, the question becomes: Should the family rent a pavilion in order to accommodate family and guest should the weather, in fact, make the event open to potential cancellation at the last minute?

Looked at another way, should the family rent the pavilion as an added benefit for the event? For example, it could be available for allowing some of the elder members of the family to rest in shady circumstances. Or it could be available as a place to store and serve food, as well ...

Solution Summary

This attempts to provide guidance for a situation which has both direct and indirect costs associated, as well has potential investment opportunities involved a apart of the solution.