Comment on the Difference Between the Npv for Modal Parameters, and the Expected Npv from the Monte Carlo Simulation. Which Gives the More Accurate Estimate of the Expected Npv?
Comment on the difference between the NPV for modal parameters, and the expected NPV from the Monte Carlo simulation. Which gives the more accurate estimate of the expected NPV? Explain why.
When the NPV parameters are greater than the actual mean of the NPV which comes from the Monte Carlo Simulation, this showed a higher rate of discounts made a lower Net Presnt Value as compared to what a lower rate of discount has provided in the simulation. The advantage of Monte Carlo methods over other techniques increases as the dimensions that result from uncertainty causing the problem to increase. This provides a more accurate estimate on expected NPV that is because it takes into account on the triangular probability distribution than otherwise would be taken and information is dealt with improved.
Give your recommendation for acceptance or rejection of the CD venture, with justification for the following two cases:
the venture manager is risk neutral;
The venture would be accepted due to profits and value of the NPV being in a positive state. Tis decision would add value to the firm and would give the CD company best possible results and ability to achieve above average returns.
The venture manager is risk averse.
Someone who is a risk adverse manager would be very sceptical in accepting the project. The returns are in a positive net present value but they would still be weary to the fact that The NPV for modal parameters is greater than the actual mean NPV which comes from the Monte Carlo Simulation. This investment has a negative skew which has more high values for the NPV. The manager would reject this investment due to the lower actual mean NPV that was obtained from the Monte Carlo Simulation