B A 323 Lecture Notes - Lecture 12: Monte Carlo Method, Scenario Analysis, Net Present Value
Document Summary
Future investments and cash flows are inherently uncertain. Need to estimate cash flows under several different scenarios. Scenario analysis - projecting cash flows under different possible states of the world. Baseline scenario - projected cash flows under the most likely outcome. How it is doing now is how it will be doing in the future. Managers often care about bond or worst-case scenarios. What happens if the economy weakens or customers don"t buy the product. Make sure that one bad investment doesn"t bankrupt the company. How to estimate cash flows in real life. The more similar a new investment is to an existing investment, the less risk in predicting future cash flows. You can have confidence that the numbers you"ve projected are accurate. If two projects have the same expected npv, select the project with the less risky cash flows. Monte carlo simulation - mathematical technique used to estimate scenarios by simulating different possible states of the world.
