Note on the Mechanics of Spreadsheet-Based Simulation with Application to Project Risk Analysis

Abstract:     
This teaching note provides step-by-step instruction for simulating the net present value and the internal rate of return of a five-year project. The uncertainty lie in the initial level of sales, sales growth rates, gross profit margins, operating expenses before depreciation, and the terminal value multiples for net working capital and plant, property and equipment. The problem is based on the opening example in the chapter on Project Risk Analysis of Titman and Martin’s (2011) valuation text, with a multi-period version of uncertain variables added, and separate random variables representing the terminal value multiples for net working capital and plant, property and equipment.

Number of Pages in PDF File: 20

Keywords: Capital Budgeting, Financial Modeling, Risk Simulation

JEL Classification: A20, C00, G31

working papers series