Uncertainty Analysis in Project Appraisal *

One of the inherent characteristics of capital investment projects is the presence of uncertainties in estimated outlays and future benefits. The concept of sensitivity analysis in project appraisal has been recently extended to include risk analysis. The assessment of the nature and magnitude of uncertainties poses methodological problems. The complexities arising out of interdependencies among the uncertainties necessitate a formal approach to risk analysis. A methodology for assessing the uncertainties, especially when they are interdependent, is outlined here. The application of the methodology is illustrated in the context of a project financed by the World Bank.