Definition for : Monte Carlo simulation

Monte Carlo simulation is an elaborate variation of Scenario analysis, based on sophisticated mathematical tools and software. It consists of isolating a number of the project's key variables or Value drivers, such as Asset turnover or margins, and allocating a probability distribution to each. All the assumptions about distributions of possible outcomes are entered into a spreadsheet. The model then randomly samples from a table of pre-determined probability distributions in order to identify the probability of each result.

(See Chapter 31 Valuation techniques of the Vernimmen)

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