SDA 3E Chapter 11

8/4/2019 SDA 3E Chapter 11

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2007 Pearson Education

Chapter 11: Risk Analysis andMonte-Carlo Simulation


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Risk Analysis Risk analysis is an approach for

developing an understanding of risk in

making decisions Data tables simple but do not

capture randomness and uncertainty

Monte-Carlo simulation

powerfultechnique for incorporatinguncertainty into risk analysis


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Financial Analysis ModelUncertaininputs

Outputvariables


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Typical Risk Analysis

Questions1. What are the chances that the store

would not be profitable by the third

year?2. How likely is it that cumulative profits

over five years would not exceed$100,000?

3. What profit are we likely to realizewith a probability of at least 0.70?


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Monte-Carlo Simulation1. Build a model for a decision problem

2. Recognize and identify uncertaintyassociated with model variables

3. Generate a probability distribution foroutcome variables

4. Analyze the effects of uncertainty inthe outcome variables.


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Financial Model Example:

Define Assumptions First year sales revenue: normal, mean = $800,000, standard deviation =

$70,000, minimum = $650,000

Annual growth rate, year 2: lognormal, mean = 20%, standard deviation = 8%

Annual growth rate, year 3: lognormal, mean = 12%, standard deviation = 4% Annual growth rate, year 4: lognormal, mean = 9%, standard deviation = 2%

Annual growth rate, year 5: lognormal, mean = 5%, standard deviation = 1%

Cost of merchandise: uniform between 27% and 33%

Labor cost: triangular, minimum = $175,000, most likely = $200,000,

maximum = $225,000 Rent per square foot: uniform between $26 and $30

Other expenses: triangular, minimum = $310,000, most likely = $325,000,maximum = $350,000

Inflation rate: triangular, minimum = 1%, most likely = 2$, maximum = 5%


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Crystal Ball Distribution Gallery


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First Year Sales Normal

Distribution Assumption


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Lognormal Assumption for

Annual Growth Rate


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Uniform Assumption for Cost

of Merchandise


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Triangular Assumption for

Inflation Rate


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Define Forecast Dialog


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Run Preferences

Trials


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Crystal Ball Forecast Chart


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Evaluating Risk

Drag grabberor enter

values in box


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Probability Interval


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Percentiles View


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Statistics View


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Computing a CI

A 95 percent confidence interval for the mean would be

$122,199 1.96($2826) or [$116,660, $127,738]


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Sensitivity Chart Contribution to

Variance View


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Trend Chart


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Overlay Chart


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Reports and Data Extraction Create customized reports from theAnalyzemenu Extract data into an Excel worksheet

Statistics Percentiles Chart Bins the intervals in the forecast chart

along with their probability and frequency ofoccurrences.

Sensitivities sensitivity data for all pairs of

assumptions and forecasts Trial Values the generated assumption and

forecast values for each simulation trial.


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Crystal Ball Functions Click on the function wizard button in

Excel and select Crystal Ball 7for a

complete list.


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Other Crystal Ball Tools Tornado and Spider Charts

Correlation Matrix

Bootstrap Tool

Batch Fit

Scenario Analysis 2D Simulation

Decision Table


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Application

Retirement Planning


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Retirement Planning Results


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Newsvendor Model


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Illustrative Newsvendor Result


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Hotel Overbooking


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Overbooking Model Forecast

Charts


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Using the Decision Table Tool


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Cash Budgeting Model


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Trend Chart Results


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Project Management


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Crystal Ball Model


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Probability of On-Time

Project Completion

Documents

SDA 3E Chapter 11