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To Simulate Monte Carlo Techniques

This document describes how to simulate Monte Carlo techniques. Monte Carlo simulation involves building models of possible results by substituting ranges of values for uncertain variables and calculating results repeatedly using random values. It provides distributions of possible outcomes. The document gives an example of using Monte Carlo simulation to estimate the first year profit of a new product, which depends on uncertain variables like sales, price, and costs. It describes setting up the simulation in Excel by defining the uncertain variables and functions, generating random numbers, and running the simulation.

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Vineet Kumar
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66 views

To Simulate Monte Carlo Techniques

This document describes how to simulate Monte Carlo techniques. Monte Carlo simulation involves building models of possible results by substituting ranges of values for uncertain variables and calculating results repeatedly using random values. It provides distributions of possible outcomes. The document gives an example of using Monte Carlo simulation to estimate the first year profit of a new product, which depends on uncertain variables like sales, price, and costs. It describes setting up the simulation in Excel by defining the uncertain variables and functions, generating random numbers, and running the simulation.

Uploaded by

Vineet Kumar
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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To Simulate Monte Carlo Techniques

By:
Vineet Kumar
Reg.no. 3010060059
BCA-MCA(IX)
Introduction to Simulation
Flexible methodology that can analyze the
behavior of a present or proposed business activity,
new product, manufacturing line or plant expansion,
and so on.
By performing simulations and
analyzing the results, we can gain an understanding
of how a present system operates, and what would
happen if we changed it.
Often -- but not always -- a simulation deals with
uncertainty, in the system itself, or in the world
around it.
Monte Carlo Simulation
A powerful method for studying the behavior of a
system, as expressed in a mathematical model on a
computer. 
Rely on random sampling of values for uncertain
variables that are "plugged into" the simulation
model and used to calculate outcomes of interest. 
Monte Carlo simulation is especially helpful when
there are several different sources of uncertainty
that interact to produce an outcome. 
Contd……
For example, if we're dealing with uncertain
market demand, competitors' pricing, and variable
production and raw materials costs at the same time,
it can be very difficult to estimate the impacts of
these factors -- in combination -- on Net Profit. 
Monte Carlo simulation can quickly analyze
thousands of 'what-if' scenarios, often yielding
surprising insights into what can go right, what can
go wrong, and what we can do about it.
How Monte Carlo Simulation
works?
Monte Carlo simulation performs risk analysis by
building models of possible results by substituting a
range of values—a probability distribution—for
any factor that has inherent uncertainty. It then
calculates results over and over, each time using a
different set of random values from the
probability functions.
Depending upon the number of uncertainties and
the ranges specified for them, a Monte Carlo
simulation could involve thousands or tens of
thousands of recalculations before it is complete.
Monte Carlo simulation produces distributions of
possible outcome values.
A Business Planning Example
Imagine you are the marketing manager for a firm that is
planning to introduce a new product. You need to estimate
the first year profit from this product, which will depend
on:
Sales in units
Price per unit
Unit cost
Fixed costs
Profit will be calculated as Profit = Sales * (Price - Unit
cost) - Fixed costs.  Fixed costs (for overhead, advertising,
etc.) are known to be $120,000. But the other factors all
involve some uncertainty. Sales in units can cover quite a
range, and the selling price per unit will depend on
competitor actions. Unit costs will also vary depending on
vendor prices and production experience.
Uncertain Variables
To build a risk analysis model, we must first identify the
uncertain variables -- also called random variables.  While
there's some uncertainty in almost all variables in a
business model, we want to focus on variables where the
range of values is significant.Sales and Price
Based on your market research, you believe that there
are equal chances that the market will be Slow, OK, or
Hot.
In the "Slow market" scenario, you expect to sell
50,000 units at an average selling price of $11.00 per
unit.
In the "OK market" scenario, you expect to sell 75,000
units, but you'll likely realize a lower average selling
price of $10.00 per unit.
In the "Hot market" scenario, you expect to sell
100,000 units, but this will bring in competitors who will
drive down the average selling price to $8.00 per unit.
To Calculate:
Net Profit
Our next step is to identify uncertain functions -- also
called functions of a random variable.  Net Profit is
calculated as Profit = Sales * (Price - Unit cost) -Fixed
costs. Sales Volume, Selling Price and Unit Cost are all
uncertain variables, so Net Profit is an uncertain function.
Net Profit in An Excel Sheet
Then Generate Random
Numbers By Following :
At Last Simulate By Old
Fashioned Simulation Software
Thanks….

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