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Chapter9:Simulation ConceptsandMethods
Project risk analysis by simultaneous adjustment of forecast values.
1
Introduction
Simulation solution of
allows the repeated 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. 2
SimulationTerminology
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 a ‘replication’ or ‘iteration’.
is known as
3
TheRoleofSimulation
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.
4
ProbabilityDistributions
Uniform: upper and lower bounds required.
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