Using Monte Carlo simulation to make better capital investment decisions.
The financial analysis of a proposed capital investment typically involves estimating the project's expected cash flows and profitability and then perhaps looking at one or two alternative scenarios. However, this procedure provides incomplete information about a project's potential risk/return characteristics because it focuses on only a few possibilities; whereas, real-world investments can have an almost unlimited number of financial outcomes. Monte Carlo simulation can solve the incomplete information problem. In a Monte Carlo simulation, relatively certain input variables are specified by single values, while relatively uncertain variables are specified by probability distributions. The end result is a probability distribution that describes the project's full range of potential profitability. With a complete set of information concerning a project's risk/return characteristics, decision makers can better judge the financial impact of the investment and hence make better capital investment decisions.
Gapenski
L C
LC
University of Florida, Gainesville 32610.
D002201:Capital Expenditures / Q000706:statistics & numerical data*; D003198:Computer Simulation; D003627:Data Interpretation, Statistical; D003660:Decision Support Systems, Management; D004467:Economics / Q000706:statistics & numerical data*; D005376:Financial Management / Q000379:methods*; D005377:Financial Management, Hospital / Q000379:methods*; D006752:Hospital Planning / Q000191:economics*; D007449:Investments / Q000706:statistics & numerical data*; D008331:Management Information Systems; D009010:Monte Carlo Method; D009874:Operations Research; D012306:Risk; D014481:United States