A Business Encyclopedia

Simulation Analysis

Definition: The Simulation Analysis is a method, wherein the infinite calculations are made to obtain the possible outcomes and probabilities for any choice of action.

The concept of simulation analysis can be further comprehended through the following steps:

  1. The first step is to model the project. A model shows how the net present value is related to the parameters and the exogenous variables. The parameters are the variables specified by the decision maker and are held constant throughout the simulation, whereas the exogenous variables are randomly determined and are beyond the control of the decision maker.
  2. The next step is to specify the values of the parameters and assign probabilities to the random variables that arise from the external factors.
  3. Randomly, select any value from the probability distribution of each of the exogenous variables.
  4. Compute the NPV for both the randomly generated values of exogenous variables and the parameter values, as specified by the decision maker.
  5. Repeat the step 3 and 4 again and again, to get a large number of simulated values of NPV.

This whole process of simulation analysis compels the decision maker to consider all the interdependencies and uncertainties characterizing the project. Thus, the viability of the project is determined on the basis of number of outcomes and the probabilities realized through a series of actions performed during the simulation analysis.

1 Comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Related pages

egoism ethical theoryproportionate stratified samplingconstant sum scale examplewho manages a proprietorshipformula of fixed assets turnover ratiodef of contingencylaw of diminishing marginal benefitneoclassical thoughtadam's equity theoryemployment provident fund actneft payment timingsmonopolies meanswhat is symanticinvestment and financing decisionsdivesting strategycomputerised stock control systemfree rein leadership advantages and disadvantagestypes of income elasticitycompensation management meaningwhat is a breakeven analysisintrapreneurial meaningauthorized meaning in urduindifferece curvecommercial entrepreneur definitionmeaning of voluntary and involuntaryresidual claim definitionoligopoly defwhat is the meaning of decentralisationmeaning of provident fundhrm activitiesthe purchasing power parity theoryxy theory of motivation pptmeaning poachingwhat is the meaning of npsstepping stones costdebenture loan definitione tailing businessdifference between lessor and lesseepolycentric definitionimportance of ansoff matrixoligopoly economics definitionteleological theory examplesmarketing auditsdelfi techniqueduality defeconomic profit meaningindifference economicsasset turnover calculatordemergerleveraged buyout meaningdefinition for hire purchasewhat is quota samplingdefine the term collective bargainingjargons in businesspsychoanalytic examplesgalloping inflationdefinition of carrotsdef of ethnocentrismformal and informal groupsdefine scalar principle5 forces model porterdefine disguisesemantic barriersivan pavlov and classical conditioningtheory x and theory y mcgregordefinition of parachutethe employees provident funds scheme 1952 account balancecredit reserve ratiodefinition gantcapital budgeting techniqueguerrilla war meaningproduct line breadth definitiondefine dasanidefine revitalized