Chapter 9: Simulation Concepts and Methods Project risk analysis by simultaneous adjustment of forecast values... Each solution randomly selects values from predetermined probabili
Trang 1Chapter 9: Simulation Concepts and Methods
Project risk analysis by
simultaneous adjustment
of forecast values.
Trang 2 Simulation allows the repeated
solution of an evaluation model.
Each solution randomly selects
values from predetermined
probability distributions.
All solutions are summarized into
an overall distribution of NPV
values.
This distribution shows
management how risky the project is.
Trang 3Simulation Terminology
The treatment of risk by using simulation
is known as ‘stochastic’ modeling.
Other names for our term ‘Simulation’, are - ‘Risk Analysis’, ‘Venture
Analysis’,’Risk Simulation’, ‘Monte Carlo Simulation’.
The name ‘Monte Carlo Simulation’
helps visualization of repeated spins of the roulette wheel, creating the selected values.
Each execution of the model is known as
a ‘replication’ or ‘iteration’
Trang 4The Role of Simulation
Follows the initial creation and basic
testing of the representative model.
Is sometimes used as a test of the model.
Emphasizes the need for formal
forecasting, and requires close
specification of the forecast variables.
Draws managements attention to the
inherent risk in any project.
Focuses attention on accurate model
building.
Trang 5Probability Distributions
of Forecast variables
Uniform: upper and lower bounds required.
Trang 6Probability Distributions
of Forecast variables
Uniform: upper and lower
bounds required.
Triangular: pessimistic,
most likely, and optimistic values required
Trang 7Probability Distributions
of Forecast variables
Uniform: upper and lower
bounds required.
Triangular: pessimistic,
most likely, and optimistic
values required
Normal: mean and variance required.
Trang 8Probability Distributions of Forecast Variables
Uniform: upper and lower bounds required.
Triangular: pessimistic, most likely, and optimistic values required
Normal: mean and variance required.
Exponential: initial value and growth factor required.
Trang 9Process of Computation per Replication
A value of a variable is selected from its distribution using a random
number generator.
For example: Sales 90 units; selling price per unit $2,350; component cost per unit $1,100; labour cost per unit
$280.
These values are incorporated into
the model, and an NPV is calculated for this replication.
The NPV for this replication is stored, and later reported as one of many in
an overall NPV distribution.
Trang 10Making the Replications
Each replication is unique.
Selection of values from the distribution is made according to the particular distributions
The automated process is driven
by a random number generator.
Excel add-ons such as ‘@Risk’ and
‘Insight’ can be used to streamline the process.
About 500 replications should give
a good picture of the project’s risk.
Trang 11Using the Output
Management can view the risk
of the project.
Probability of generating an NPV between two given values can be calculated.
Probability of loss is the area to the left of a zero NPV.
Trang 12Benefits and Costs of Simulation
Focuses on a detailed definition and analysis
of risk.
Sophisticated analysis clearly portrays the
risk of a project
Gives the probability of a loss making project
Allows simultaneous analysis of variables
Requires a significant forecasting effort.
Can be difficult to set up for computation.
Output can be difficult to interpret.