INTRODUCTION TO FINANCIAL MANAGEMENT-unit 3, question # 2 Essay

INTRODUCTION TO financial MANAGEMENT-unit 3, question 2 - Essay ExampleThis is achieved by randomly selecting observations from solely the distributions that influence the outcome of the cast off and this goes on until a representative record of the probable outcome of the project is obtained. An illustration for this is a chemic producer who wants to extend its processing plant. The first step will be to determine the probability distributions for all factors that will influence the returns of the project such as investment required, fixed costs, operation costs, selling price, market size among others. After this, the computer randomly picks out one observation from this list according to the chances of its positive occurrence in the future. The observations are then combined and a Net Present Value (NPV) or Internal Rate of Return (IRR) figure is calculated. This is repeated severally until a clear portrait of the anticipate outcome is obtained (Keown et al, 1998).Unlike the risk-adjusted discount rate method which gives one value for the risk-adjusted NPV, simulation gives the investments IRR or NPV probability distribution. According to Keown et al (1998), this method provides the function of possible outcomes for the project under the best, crush and closely likely cases. It should also be noted that the inputs to a simulation comprises of all the key factors touching the profitability of a project. In addition to this, the output obtained provides the probability of various outcomes occurring. This output is a probability distribution of the internal rates of return or the net present values for the project.From the above explanation, it is conceivable to state that the value of this method is quality decision making. Decision makers will use the whole range of possible outcomes of the project to determine the level of risk of the project and use this information to make the most appropriate decisions. Simulation is also very important for t he