Introducing risk modeling in corporate finance

Abstract

This paper aims to introduce a simulation modeling in the context of a simplified capital budgeting problem. It walks the reader from creating and running a simulation in a spreadsheet environment to interpreting simulation results to gain insight and understanding about the problem. The uncertainty lies primarily in the level of sales in the first year of the project and in the growth rate of sales thereafter, manufacturing cost as a percentage of sales, and the salvage value of fixed assets. The simulation is carried out within a spreadsheet environment using @Risk.