ACCA FM Syllabus D. Investment Appraisal - Simulation - Notes ^{4 / 5}

This looks at many variables all changing at once

• Illustration

The random numbers represent the probability. So, 30 numbers are given to the 30% range, 50 to the 50% range etc.

A random number is generated - say 48

So NPV based on a variable cost of 5 is generated

This is repeated many times for all variables until we have a probability distribution

Advantages

1. Includes all possible outcomes

2. Easily understood

3. Wide variety of applications

Disadvantages

1. Model can become complex and expensive to set up

2. Probability distributions difficult to formulate