Asked by Christin Sajan on Jul 07, 2024
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Risk can be incorporated into capital budgeting through a computer technique called Monte Carlo Simulation in which the computer simulates the project many times by drawing cash flows randomly from probability distributions.
Monte Carlo Simulation
A computational technique that utilizes random sampling and statistical modeling to estimate mathematical functions and mimic the operation of complex systems.
Probability Distributions
A mathematical function that outlines every potential value and their probabilities that a random variable might assume across a specified spectrum.
Capital Budgeting
The process of evaluating and selecting long-term investments that are in line with the goal of the investor's wealth maximization.
- Recognize the application and importance of risk analysis techniques in capital budgeting, including Monte Carlo Simulation.
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Learning Objectives
- Recognize the application and importance of risk analysis techniques in capital budgeting, including Monte Carlo Simulation.
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