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

Define insurance company that takes on the greater risks, Which type of ins...

Which type of insurance company generally takes on the greater risks: a life insurance company or a property and casualty insurance company? The risks protected in opposition to

Financial plan development, You need to tick all the boxes below to acknowl...

You need to tick all the boxes below to acknowledge that your Statement of Advice complies will all the requirements. This checklist needs to be appended to the cover sheet of the

Hy would a borrower be willing to pay and a lender demand, Would there be p...

Would there be positive interest rates on bonds in a world with absolutely no risk no default risk, maturity risk, and so on? Why would a, borrower be willing to pay and a lender d

Total cost of operating the business, Joe's ice cream stroe has to decide w...

Joe's ice cream stroe has to decide whether to shut down this winter or stay open. His projected revenue is $1,200 per week. He has fixed costs (Mortgage, taxes, insurance, etc.) t

Budgeting, Budgeting: All business owners should recognise and understa...

Budgeting: All business owners should recognise and understand the importance of preparing and maintaining a financial budget for their business. Budgets are an essential fi

Define decision to not permit price to ration goods, What reasons do govern...

What reasons do governments frequently give to justify the decision to not permit price to ration goods? (a) Price gouging is bad. (b) Income is unfairly distributed. (c) Some

base-case NPV, Ask question #MiniA project under consideration costs $750,...

Ask question #MiniA project under consideration costs $750,000, has a five-year life, and has no salvage value. Depreciation is straight-line to zero. The required return is 17 per

Explain the term - yield to call, Illustrate the process of calculating cal...

Illustrate the process of calculating call/ put options yields Issuing corporation will use provision if interest rates fall substantially below coupon rates offered on the se

Benefits of mentoring for new members of staff, JB has recently joined the ...

JB has recently joined the Finance Department of P Company as a trainee management accountant. As part of the Company's induction, she has been offered a mentor. Though, since JB h

Estimating cash flows in valuation process, The first step in valuati...

The first step in valuation process is to estimate the cash flows that are expected to be received in the future. In debt securities, there are two types of possi

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