Advances in Social Science, Education and Humanities Research (ASSEHR), Volume 80

Advances in Social Science, Education and Humanities Research (ASSEHR), volume 80
International Conference on Education, Culture and Social Development (ICECSD 2017)
Assessing enterprises’ value with Monte Carlo Simulation: In

Application of Microsoft Excel
Qingfan Hu*, Xiao Wan, Manlian Yu, Zheming Lu
Nanjing University of Science and Technology, Nanjing,China
Email：[email protected]
Abstract. Assessing enterprise’s value can either be a conventional project operation or a company
investment that allows managers to effectively improve their business decisions in order to maximize
enterprise values.However,traditional methods that can be used for accessing enterprise’s value
neglect the uncertainty of parameters.So in this case , the paper introduce Monte Carlo simulation ,
solves the problem by which traditional models are overlooked.The paper concentrates on how to do
Monte Carlo in application of Microsoft Excel.
Keywords: Assessing Enterprise’s Value ; Microsoft Excel ;Monte Carlo Model
1 Introduction
People commonly use DCF,IRR,CMPA,EVA and so on to evaluating enterprises’ value.Most of these
traditional models need to consider one parameter that called free cash flow.When estimating this
parameter, the prior models are short of accurate method.For example, when estimating free cash flow
we often calculate ROI to get future growth rate then calculate the FCF year by year. Obviously, the
application of this method lack operability. Because of this weakness, this kind of model usually used
in the field of education only.
Monte Carlo simulation precisely solve this problem. This model improve the traditional methods and
enhanced the operability by thousands of simulation tests.
2 Introduction of Monte Carlo simulation

Monte Carlo simulation also called random simulation, it was put forward by American scientists in
1940s. The method obtain the approximate results by statistical analysis and stochastic simulation of
random variables.Take DCF model as an example, If the free cash flow of the investment project in
the future is expressed as a random variable with a certain probability distribution, we can improve the
accuracy of traditional model according to the probability distribution of these random variables.
Under the manual condition, it is difficult for people to operate thousands of tests.In this case, people
prefer to use matlab in the application of Monte Carlo simulation.In fact, the common Microsoft Excel
is enough to solve this problem. The following paper use an example to show how to complete that
exactly.
2.1Problem description
Here is a hypothetical scenario, our purpose is to assess the value of the following enterprise.The
discount is 10%.
There is a new enterprise,the initial investment of this enterprise is 2.5 million.It is expected to obtain
mature period in 3 years. According to the industry analysis ,the company’s final value is expected to
achieve 5 million.In the operation of this company, the sales of the first year is appeared to be normal
distribution which average is 1.8 million and standard deviation is 0.5 million. Based on the life circle
rule of this product, sales will grow in the rate of 10% per year.It also need to be invested 1 million
fixed cost per year.The unit variable costs of this new product is evenly distributed from 3 to 5. An
agency carry on a market research on the price of this product, the result is as follow.
Copyright © 2017, the Authors. Published by Atlantis Press. 89

This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).
Tab1. The result

unit price 2 3 4 5 6 7 8
Probability 10% 10% 20% 20% 30% 5% 5%
2.2 Steps of Monte Carlo simulation(all the data and figures are randomly generated , just for
explanation)
(1)Determine the model.Here use equation 1 as a model to compute the value of enterprise.
N
E (CFt ) E (CFN 1 )
value   
t 1 (1  r ) (r  g n )(1  r ) N
t
(1)
(2)Build the model interface.According to the description of the question, model interface including
initial parameter input area,data generation area,data output area(middle results),data output
area(final results),statistical area,graphics area,test area and so on .
(3)Input initial data.Input data in (A2:B10) like following figure1.
fig.1 Input initial data.

(4)Use NORMINV(RAND(),E5,E6) in B14 to get the result of initial sales.Use BEP model to get
price in B15.Use function ROUND(RAND*(B8-B7)+B7,B7) to output the result of unit variable cost.
fig.2 Result of initial sales

(5)Complete output area(middle result).
fig.3 Complete output middle result area

(6)Complete output area (final result).
Here use equation1 and quote NPV() function in EXCEL.Get the result of enterprise’s value .
fig.4 Complete output final result area

(7)Complete test area.
According to distribution of price, build data group that including one thousand tests.Detailed skill is
as follow.Firstly, input 100 unit price based on the probability of price above. Secondly,select data
90
sheet function to build {Table(B15,F31)} which contains 1000 simulation test data of present
value(full figure omitted here), this data sheet apply the eq1 and independent variable is price here.
fig.5 Complete test area.

(8)Complete statistical area.
Here are four index need to be considered.The mean ,standard deviation,minimum,maximum of 1000
test data above. The function use here is AVERAGE(),STDEV(),MAX ()and MIN().
fig.6 Complete statistical area

(9)Complete graph area.
This area contains two parts. First is control panel parameter table(f8) and second is frequency
distribution statistics table(f7).This area is built to count the probability of the present value based on
the 1000 test data.The function used here is FREQUENCE(),INDEX(),ROUND().FREQUENCY
here is used to get the frequency distribution statistics table .F6 shows part of this table and blank B56
use ROUND() combined maximum to determine the first scale.And the design of the control panel
parameter table.Here use INDEX() combined with the data in the frequency distribution statistics
table.In this example use INDEX(F56:F87,J55) to fill B57. F56: F87 varies 32 scales in this example.
fig.7 Rrequency distribution statistics table
fig.8 Control panel parameter table

(10)Complete graph.
Microsoft Excel can be used to draw graph based on the handled data to simulate present value.Use
Insert graph function to draw probability distribution graph(f9),Cumulative probability graph(f10)
and probabilistic decision graph(f11) based on the data of the previous part which can be used to show
the detailed information and process status of the enterprises’ value.
91
fig.9 Probability distribution graph fig.10 Cumulative probability graph
fig.11 Probabilistic decision graph

From the figure , the information users can easily get the information which is wanted.If the investor
need to make the decision for investing ,the graph clearly show the probability of the present value
after three years.
3 Conclusions
Based on the previous example,through plenty of tests in Monte Carlo,the uncertainty of the free cash
flow in the future can be solved in a better way.It provides a more scientific method to accessing
enterprise’ value.With the help of Microsoft Excel can avoid the difficulty of manual computation.
Above all, the author thinks this method can be utilized and promoted.
References
[1]Yuefan Sun, Di Qi and Ruolan Zhang:Application of Monte Carlo Simulation to Enterprise
Investment Decision Analysis,Friends of Accounting publishers (2012).
[2]Liuliu Zhou, Subin Wen:Advanced accounting for Excel in management accounting,Finance and
Accounting publishers(2014)
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Advances in Social Science, Education and Humanities Research (ASSEHR), volume 80

International Conference on Education, Culture and Social Development (ICECSD 2017)

Assessing enterprises’ value with Monte Carlo Simulation: In

Keywords: Assessing Enterprise’s Value ; Microsoft Excel ;Monte Carlo Model

2 Introduction of Monte Carlo simulation

Copyright © 2017, the Authors. Published by Atlantis Press. 89

Tab1. The result

fig.1 Input initial data.

fig.2 Result of initial sales

fig.3 Complete output middle result area

fig.4 Complete output final result area

fig.5 Complete test area.

fig.6 Complete statistical area

fig.7 Rrequency distribution statistics table

fig.8 Control panel parameter table

fig.9 Probability distribution graph fig.10 Cumulative probability graph

fig.11 Probabilistic decision graph

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