RISK MANAGEMENT OF AN INVESTMENT PROJECT THROUGH MONTE CARLO SIMULATION

Hristoski, Ilija and Sotiroski, Kosta and Zdravkoski, Igor (2012) RISK MANAGEMENT OF AN INVESTMENT PROJECT THROUGH MONTE CARLO SIMULATION. International Journal of strategic management and decision support systems in strategic management. pp. 3-15. ISSN 1821-3448

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Abstract

There are not many certainties while doing business in the contemporary world, especially during periods of economic downturns. Business decisions have always been accompanied with a substantial amount of risk. In the area of project investments, safe investing has become a priority for many investors following the global financial crisis of 2007-2008, which caused so much stress.
Republic of Macedonia was not exempted from negative impacts. Due to numerous disastrous effects, including labor jobs reduction, additional increase of unemployment rate, decrease of salaries etc., and having on mind the significant agricultural tradition of the country, many have been forced to turn to start their own business in production of various agricultural products, including tobacco, vegetables, fruits etc., thus making their first project investments. However, despite the current advances in risk management methodologies, risk assessment has almost always been neglected, and decisions about whether to invest or not have been typically based either upon somebody’s previous experiences, or by applying ad hoc rules of thumb.
Managing the risk is a crucial part of the decision making process any executive in a company must make. It is a substantial part of any investment project, as well. One of the most advanced and widely utilized methodologies for quantifying risk is the Monte Carlo simulation, a tool that can help project managers to determine the level of risk intrinsically involved in complex situations, and before making any decision related to a project. The application fields include, among others, financial risk analysis, valuation, engineering, portfolio allocation, cost estimation, and project management.
Within the paper we show how Monte Carlo simulation can be effectively utilized for valuation of real investment project related to production of strawberries, based on discounted cash flows (DCFs) and simulation of net present value (NPV), as well as other relevant economic indicators.

Keywords: Monte Carlo simulation, risk management, net present value (NPV), discounted cash flow (DCF), investment project valuation

Item Type: Article
Subjects: Scientific Fields (Frascati) > Social Sciences > Economics and Business
Divisions: Faculty of Economics
Depositing User: Mr Dimitar Risteski
Date Deposited: 19 Feb 2020 10:33
Last Modified: 19 Feb 2020 10:33
URI: https://eprints.uklo.edu.mk/id/eprint/3079

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