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474 Corporate Finance BRILLIANT’S

Significance _hËd
Simulation analysis is a useful technique {gå`yboeZ EZm{b{gg, [añH$ H$m {díbofU H$aZo H$s
for risk analysis. It can be applied to capital EH$ Cn`moJr Q>opŠZH$ h¡Ÿ& `h H¡${nQ>b ~OqQ>J g§~§Yr {ZU©`m|
budgeting decisions also. The different Ho$ {bE ^r à`moJ _| bmB© Om gH$Vr h¡Ÿ& H¡$e-âbmoO Ho$
components of cash flows are placed in relation {d{^ÝZ H$ånmoZoÝQ²>g H$mo EH$-Xygao go g§~§{YV H$aHo$
to one and other in a mathematical model. The
_¡W_o{Q>H$b _m°S>b Ho$ ê$n _| aI {X`m OmVm h¡Ÿ& aoÝS>_
process of generating the random number and
Zå~a OZaoQ> H$aZo H$s àmogog VWm H¡$e-âbmoO Ho$
using the probability distribution of cash flows àm°~o{~{bQ>r {S>ñQ´>rã`yeZ H$m Cn`moJ H$aHo$ {d{^ÝZ d¡[aE~ëg
help in generating values of different variable.
These values are put in a mathematical model H$s d¡ë`yO OZaoQ> H$aZo _| ghm`Vm {_bVr h¡Ÿ& BZ d¡[aE~ëg
H$mo EH$ _¡Wo_o{Q>H$b _m°S>b _| aIH$a NPV kmV H$s OmVr
to develop NPV. The same process is repeated
hundreds of times to create a probability h¡Ÿ& Bgr à{H«$`m H$mo g¡H$‹S>m| ~ma XmohamH$a NPV H$m
distributions of NPV. The simulation allows to àm°~o~o{bQ>r {S>ñQ´>rã`yeZ {H«$EQ> {H$`m OmVm h¡Ÿ& {gå`yboeZ
consider the projects under alternative {H$gr àmoOoŠQ> H$mo {d{^ÝZ pñW{V`m| _| Om±MZo H$s gw{dYm
scenarios. àXmZ H$aVm h¡Ÿ&
Limitations NPP {b{_Q>oeÝg
The practical use of simulation analysis is {gå`wboeZ EZm{b{gg H$mo ì`dhm[aH$ ê$n _| bmJy
limited due to following limitations: H$aZo H$s {ZåZ{b{IV gr_mE± h¢…

(i) The model becomes very complex to use (i) Bg _m°S>b H$m Cn`moJ H$aZm O{Q>b hmoVm h¡ Š`m|{H$
because the variables are inter-related d¡[aE~ëg EH$-Xygao go BÝQ>a[aboQ>oS> hmoVo h¢Ÿ&
with each other.
(ii) It is very difficult, expensive and time (ii) g^r gå^m{dV [aboeZ{eßg H$mo nhMmZZm Am¡a CZHo$
consuming to identify all possible relation- àmo~o{~{bQ>r {S>ñQ´>rã`yeZ H$m AZw_mZ bJmZm H${R>Z,
ships and estimating probability distri- IMubm Ed§ Q>mB_ H$ÝÁ`yq_J h¡Ÿ&
bution.
(iii) The model only helps in generating a (iii) `h _m°S>b {H$gr àmoOoŠQ> H$s NPV H$m àmo~o{~{bQ>r
probability distribution of the project’s {S>ñQ´>rã`yeZ OZaoQ> H$aZo _| ghm`Vm H$aVm h¡Ÿ& {H$ÝVw
NPVs but it does not indicate whether a `h Zht Xem©Vm {H$ àmoOoŠQ> {gboŠQ> H$aZm Mm{hE `m
project should be selected or not. AWdm ZhtŸ&
(iv) Simulation analysis considers the risk of (iv) {gå`wboeZ EZm{b{gg {H$gr àmoOoŠQ> go g§~§{YV [añH$
any project in isolation of other projects. If H$m {díbofU AÝ` àmoOoŠQ²>g na Ü`mZ {XE {~Zm
the portfolio of projects is considered, H$aVm h¡Ÿ& `{X àmoOoŠQ²>g Ho$ nmoQ>©\$mo{b`mo H$m Cn`moJ
unsystematic risk can be diversified. {H$`m OmE Vmo AZ{gñQ>_¡{Q>H$ [añH$ H$mo hQ>m`m Om
gH$Vm h¡Ÿ&
(v) The decision maker may not use the model (v) `{X {S>[gOZ _oH$a Bg _m°S>b H$mo R>rH$ T>§J go g_P
if he does not understand it properly. Zht boVm Vmo dh BgH$m Cn`moJ Zht H$a gH$VmŸ&
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