Microsoft® Office Excel® 2007: Data Analysis and Business Modeling, Second Edition

Chapter 60. Introduction to Monte Carlo Simulation

• Who uses Monte Carlo simulation?

• What happens when I type =RAND() in a cell?

• How can I simulate values of a discrete random variable?

• How can I simulate values of a normal random variable?

• How can a greeting card company determine how many cards to produce?

We would like to accurately estimate the probabilities of uncertain events. For example, what is the probability that a new product’s cash flows will have a positive net present value (NPV)? What is the risk factor of our investment portfolio? Monte Carlo simulation enables us to model situations that present uncertainty and then play them out on a computer thousands of times.

Note

The name Monte Carlo simulation comes from the computer simulations ...