DS 235

Spreadsheet Modeling

The process of entering inputs and decision variables into a spreadsheet and relating them through formulas to obtain outputs.

Phase 1 of Analysis

Analyst envisions possible outcomes from an investment and prepares estimates and forecasts.

Phase 2 of Analysis

Analyst details sources of risk, identifies value drivers and uncertainty, seeks to mitigate risks, and monitors throughout the project's life.

Flaw of Averages

The average model input does not always lead to the average model output, often due to oversimplifying reality by focusing on a single number.

Sensitivity Analysis Results

Provide possible outcomes for a range of values of a variable, assuming other variables remain static.

Monte Carlo Simulation

Simulations that incorporate probabilities and uncertainties to determine possible outputs, providing a distribution of results.

Probability Distributions

Mathematical functions that describe the likelihood of various outcomes; includes uniform, triangular, normal, histogram, and discrete distributions.

Continuous vs Discrete Distributions

Continuous distributions have a range of possible values, while discrete distributions have specific values without variance. (Examples: uniform, triangular, histogram, and normal).

Basic Premise of Monte Carlo Simulation

A random sample has the same characteristics as the entire population, enabling analysis of sub-samples when the full data set is impractical. Based on statistical inference where a sample of the population is analyzed when it is impossible to analyze the entire population.

Risk Analysis Outputs

Include standard deviation, percentiles, mean, probabilities, and correlation to describe the distribution of results.

Scenario Analysis

Broadens the horizons of discounted cash flow (DCF) by considering multiple future scenarios.

Decision Trees

Graphical representations of relationships between decision alternatives and their possible outcomes over time.

NET PRESENT VALUE (NPV)

Accepted if a project earns a positive NPV, based on forecasted investment costs and expected future revenues.

Net Cash Flow

Calculated as Total Costs minus Total Revenue.

Deterministic Model

A model that does not account for uncertainty in its predictions.

Uncertainty

Nothing is absolute, everything has risk.

Goal of a Simulation

To determine the statistical distribution of a result.

Simulation with Low Risk

Lower standard deviations

Simulation

Uses random numbers to drive the whole process.

Net Present Value

NPV

Deterministic

Does not have uncertainty

Strategic Decision

Long time horizons (quarters, years) in mergers and long term investments.

Operational Decisions

Short time frames (days and weeks) in production scheduling, hiring, and sales forecasting.

Net Cash Flow = Profit

Total Costs - Total Revenue