Opinion
Building Monte Carlo analyses from scratch is demanding. But existing solutions provide reliable and manageable approaches to Monte Carlo assessments in business applications (e.g. integration of the Monte Carlo method within existing Excel models).
T
he Monte Carlo analysis method generates a large number of
scenarios to approximate the entire range of potential outcomes.
Still, the challenge remains to systematically structure the risk analysis around the requirements of the existing business case.
Conclusion Using the described methodologies, possible outcomes of an investment will be assessed more realistically than is possible with simple static models. Executive decision-makers will have deeper understanding of the consequences of their decisions. T e pragmatic approach will give them an easy-to-understand explanation of the numbers presented. T is way, valuable time can be used for actual decision-making instead of alignment and communication of oversimplifi ed assumptions. In the asset evaluation example from the energy and utilities industry, the use of the method led to the following two outcomes:
● A switch from the originally planned investment decision to a more lucrative option
● A drastic reduction in the alignment eff ort between the supervisory and executive boards due to a common understanding of the business case.
T e revision ultimately resulted in increased benefi t of approximately 30% of the previously expected net present value. ●
Evgeni Kochman, business analyst, Fabian Sempf, consultant and Michael Kruse, partner, are with international management consultants Arthur D Little in Germany.
www.adlittle.com
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