1 BA 555 Practical Business Analysis Midterm Examination #2 Simulation Agenda

2 Key Idea: Use Probability Distributions to Describe Uncertainty/Summarize Experience Probability Distributions

3 Estimated Unit Sales Summarize your experience/knowledge on unit sales using: =RiskUniform(0.08, 0.12) =RiskNormal(0.10, 0.02) =RiskNormal(0.10, 0.001) =RiskPert(0.08, 0.10, 0.12) =RiskTriang(0.08, 0.10, 0.12) =RiskDiscrete({0.08,0.10, 0.12},{0.1, 0.7, 0.2}) =RiskDUniform({0.08, 0.10, 0.12}) or =RiskDUniform( data range )

4 NPV: Simulation Results

5 Corporate Health Insurance (pp.85-90)

6 “Convenient” Approaches (pp.86-88) Most-Likely Values Increase in number of employees: 2% per month Increase in average claim size: 1% per month Total cost: $36 million Best Case Increase in number of employees: -3% per month Increase in average claim size: -5% per month Total cost: $11 million Worst Case Increase in number of employees: 7% per month Increase in average claim size: 7% per month Total cost: $104 million

7 Choosing a Probability Distribution (p.88) Without past observations With very limited amount of information, try to estimate Max, Min, and Most Likely values and use =RiskPert (or =RiskTriang) With more information (e.g., percentiles), look for a distribution that reflects the information. With past observations Click the Define Distributions icon and New will find a distribution that fits the data.

8 Example 5 Software Development Project (p.97) A software development project consists of 6 activities. What is the expected duration for the entire project?

9 Example 3. IRR (p.93) Is there more than 80% chance that the IRR exceeds the discount rate of 15%?