1 Applying Simulation to Decision Problems. 2 Monte Carlo simulation: A simple example Cash inflows Probability outflows Probability ($) (%) ($) (%) 50.

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Presentation transcript:

1 Applying Simulation to Decision Problems

2 Monte Carlo simulation: A simple example Cash inflows Probability outflows Probability ($) (%) ($) (%)

3 Assigning random numbers to cash inflows Cash inflowProbability Random ($) (%) numbers – – –99

4 Assigning random numbers to cash outflows Cash outflowProbabilityRandom ($) (%) numbers – –99

5 Ten simulations of monthly cash flows

6 Estimating probabilities from the simulation results

7 The effect of the number of simulations on the reliability of the probability estimates

8 Factors affecting profit earned by the plate

9 Estimates of values for Elite pottery

10 Tornado diagram for Elite pottery

11 Probability distributions

12 Simulation results

13 Probability distribution of profit earned by commemorative plate

14 Probability distribution for profit on the figurine

15 A comparison of the two probability distributions

16 Cumulative probability distributions

17 First-degree stochastic dominance

18 Two more cumulative distributions

19 Second-degree stochastic dominance

20 The mean-standard deviation screening method

21 A normal distribution for profit

22 Examples of quadratic utility functions

23 Annual cash flows for two machines

24 Calculating the NPV for the Alpha machine

25 Calculating the NPV for the Beta machine

26 Probability distributions for Alpha machine

27 NPV probability distributions for the two machines