Monte Carlo Simulation is a stochastic method based on the analysis of similar random experiments. Problems that cannot be solved analytically or that can only be solved with great effort are analyzed numerically by using probability theory. It is based on the law of large numbers. The analysis program performs the required random experiments.
Monte-Carlo-Simulations can be used to analyze the influence of all input parameters on relevant key figures:
- Sales quantities and prices, exchange rates
- Bill of material
- Manufacturing / production, logistics
- Ramp up costs, development costs, tooling payments, overhead
- Fixed assets (investments) and fixed costs
- Inventories, receivables, liabilities
- Discount rates, WACC, interest rates, tax rates, inflation
The future is uncertain and can only be estimated within certain bandwidths. Together we set minima, maxima and probability distributions for critical variables. The logic of the project is programmed specifically. Various random parameter combinations are simulated and all key figures are calculated simultaneously. We receive functional relationships, statistical distributions and risk profiles of the economic key indicators. The results are important information for the right decision making. We also receive critical combinations of input variables under which the project becomes uneconomical.
An additional Monte Carlo simulation for each risky asset of the project provides the volatility of the risky asset as parameter for Real Options Analysis. Real options themselves can be analyzed by Monte-Carlo-Simulation as well.