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

How does the market determine the fair value of a bond, How does the market...

How does the market determine the fair value of a bond? The fair value of a bond is a present value of the bond's coupon interest payments plus the present value of the face va

Determine the cash flow budget - monthly cash disbursement, Your friend Pet...

Your friend Peter is planning to set up a new business which will manufacture and sell wooden tables. The parts that make up the table consist of a wooden table top measuring 1m by

Estimate the cost of equity capital, You are required to choose a company f...

You are required to choose a company for analysis.  This company should be quoted on one of the principal international exchanges.  It may be your own company.  You should then do

Defien contractual savings institutions, Contractual savings institutions ...

Contractual savings institutions Contractual savings institutions obtain funds at periodic intervals on a contractual basis. The industry is classified into two main groups ins

Leverage, evaluate the importance of leverage in financial management of a ...

evaluate the importance of leverage in financial management of a small scale company

Agency problem, Discuss how a business might limit agency problem between m...

Discuss how a business might limit agency problem between management and creditors

Types and causes of unemployment, Question 1: (a) Discuss the main limi...

Question 1: (a) Discuss the main limitations of using changes in national income as an index of economic welfare. (b) What are the alternatives measures and issues that sho

Compute the rate of return on investment, Suppose you are a euro-based inve...

Suppose you are a euro-based investor who simply sold Microsoft shares which you had bought six months ago. You had invested 10,000 euros to buy Microsoft shares for $120 each shar

Asset depreciation range, Work out and submit the comprehensive problem bel...

Work out and submit the comprehensive problem below. Halstrom Corporation purchased a piece of equipment three years ago for $230,000. It has an asset depreciation

Objectives and functions of asic, Objectives and Functions of ASIC The ...

Objectives and Functions of ASIC The objective of ASIC is to ensure the confident and informed participation of consumers in the financial system. To attain this objective, it

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