Pros and cons of simulation technique, Financial Management

Assignment Help:

Pros and Cons

Simulation technique allows experimentation with a model of the real life system. Whenever experimenting with the system itself is risky and/or costly, simulation helps in forming a fair idea of the outcome of changes in certain variables. Usually, after constructing the model of a system, one or more input variables are varied for each successive experiment. This would help in the recognition of the major parameters governing the system and proper measures can be taken to improve the overall performance of the system.

Simplifications and assumptions usually required in analytical approaches, are not required for simulation. Hence, managers can easily understand and appreciate simulation. Simulations can also be used to break down complex systems into sub-systems and study the behavior of each of these sub-systems individually or jointly with other sub-systems.

Another advantage of the simulation approach is its flexibility. Extremely complex systems with uncertainty can be studied with a reasonable degree of accuracy. Note that reliability of the results - whether from simulation or analytical approach - depends crucially on how well the mathematical model represents the real system.

The main disadvantage of simulation is that it is very computer-intensive. Large blocks of expensive computer time may be necessary even for a relatively simple problem. This is particularly true when a large number of runs are required to ensure a reasonable degree of accuracy.

Another drawback is that it does not produce optimal solutions. As the number of parameters increases, the difficulty in finding the optimum values increases to a great extent.

Finally, in terms of information requirements to formulate a reasonable model, the simulation approach is not very different from the analytical approach. While uncertainty can be built into a simulation model, most of the times a simplistic model may be used.

The simulation approach has found extensive applications in the area of business decision making. Some examples are, investment appraisal under uncertainty, analysis of performance of portfolios, waiting line problems, corporate financial models, corporate planning, inventory decisions, etc. Any complex system about which the investigator has sufficient knowledge in terms of interrelationship of variables can be tackled with this approach.

 


Related Discussions:- Pros and cons of simulation technique

Initial public offering (ipo), The process by which an organization increas...

The process by which an organization increase money by issuing equity and gets listed on a public stock exchange.

Explain the aspects of financing decision, Explain the aspects of financing...

Explain the aspects of financing decision The financing decision covers two interrelated aspects: (1) capital structure theory (2) capital structure decision.

Acquisition strategy, T he acquisition strategy The most important str...

T he acquisition strategy The most important strategic consideration is the size of the acquisition. The completion of smaller series should be considered in the beginning tha

Explain dividend policy decision, Q. Explain Dividend Policy Decision? ...

Q. Explain Dividend Policy Decision? Dividend Policy Decision: - The financial management has to make a decision as to which portion of the profits is to be distributed as divi

Financial bootstrapping, Briefly describe the major differences between a s...

Briefly describe the major differences between a sole proprietorship and a corporation. Under which form would you choose for a business, and why? Describe the meaning of financi

Benefit and drawback of maintaining many manufacturing sites, Discuss the b...

Discuss the benefits and drawbacks of maintaining multiple manufacturing sites like a hedge against exchange rate exposure. Answer:  To set up multiple manufacturing sites can

Treasury inflation-protected securities or tips, Treasury Inflation-P...

Treasury Inflation-Protected Securities (TIPS) are the inflation-indexed bonds, the US Treasury offers. The first offer was made in the year 1997. As the name sug

Cost of capital, discuss the cost of capital in finance

discuss the cost of capital in finance

Bond's capital gain yield, A 10-year, 12% semi-yearly coupon bond with a pa...

A 10-year, 12% semi-yearly coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,050. The bond sells for $1,050. (Suppose that the bond has just bee

What is corporate social responsibility, (a) The term "financial reporting"...

(a) The term "financial reporting" incorporates not only financial statements, but also includes other means of communicating financial and non-financial information. Financial rep

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd