Monte Carlo Simulations in Project Valuation under Risk

Monte Carlo Simulations in Project Valuation under Risk 

Most R D projects involve expenditures and savings over a period of years. To connect the value of cash flows with different time periods, it is essential to employ a cash flow analysis method that takes into account the time value of money. In finance, such methods are called discounted cash flow methods. A particularly useful method is the net present value (NPV) analysis. The NPV measures the difference between the present value of cash inflows and the present value of cash outflows. It is defined as 

MC simulations for project valuation under risk start with the choice of a financial quantity (e.g. the NPV) which has to be a known function of value drivers. For each of these input variables a probability distribution has to be chosen so as to represent the known (assumed) interval and expected probabilities for certain discrete values as precisely as possible. Frequently used probability distributions include the normal distribution, exponential distribution, and uniform 

Integrated management software such as the Degussa-specific solution In-noToolBox, which is based on PipelinePlanner, a software suite developed by the Perlitz Strategy Group, provide MC simulations as one of a variety of tools to control the financial aspects of R D projects. In our opinion, this is of particular importance in process intensification. 

Miller, L. Morris, 4th Generation R D - Managing Knowledge, Technology, and Innovation, 1999, John Wiley Sons, Inc., New York 

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