Page 8 - CIMA MCS Workbook May 2019 - Day 2 Suggested Solutions

CIMA MAY 2019 – MANAGEMENT CASE STUDY

Simulation

Simulation is sensitivity analysis done on a much larger scale, running the appraisal many times
with different combinations of variables included to get an idea of the pattern of overall potential
results.

Real options

When there is significant uncertainty about a potential investment, it is also worth taking into
consideration any real options that give the project added flexibility if circumstances change. This
can be flexibility such as the ability to easily shut down the project without too many losses if the
market doesn’t turn out to be as attractive as we’d hoped, or the ability to easily scale up the
project if the market growth is higher than predicted. Perhaps it might be possible that we could
switch the use of a new factory from production for the UK market to production for the US
market if market conditions make it favourable to do so.

Note that all of these techniques will allow better decisions to be made when uncertainty is
involved but none of them will give an absolute accept or reject decision about the project. It will
still come down to a decision based on professional judgement and experience that does involve
an element of risk being taken on.

Finance Manager

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