Monte Carlo simulation
A) Can be useful for estimating a project's stand-alone risk.
B) Is capable of using probability distributions for variables as input data instead of a single numerical estimate for each variable.
C) Produces both an expected NPV (or IRR) and a measure of the riskiness of the NPV or IRR.
D) All of the answers above.
E) Only answers a and b are correct.

Question

Quizplus · Accepted Answer

All of the statements (A, B, and C) are accurate descriptions of Monte Carlo simulation. It is useful for estimating a project's stand-alone risk by simulating thousands of possible scenarios based on input variables and their assigned probability distributions. This allows for a more comprehensive understanding of risk than using a single numerical estimate for each variable. The simulation produces both an expected NPV (or IRR) and a measure of the riskiness of the NPV or IRR, typically expressed as a range, probability distribution, or other statistical measure.

Monte Carlo Simulation