What are the steps involved in using simulation to evaluate a strategy?

Explain each using a specific example of your own or use the DCF illustration

in Section 6.4 to identify the steps and explain how they are useful in evaluating the key decisions in your example.

 Section 6.4 

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Known inputs Discount rate 10% Expected Uncertain inputs Investment cost $120,000 Year 1 revenue $90,000 Annual fixed cost $35,000 Annual revenue growth rate 5.0% Annual variable cost percentage 50.0% Financial projections Year Investment cost Revenue Fixed cost Variable cost Cash flow 0 1 2 3 4 5 ($120,000) 6 7 8 9 10 $90,000 $94,500 $99,225 $104,186 $109,396 $114,865 $120,609 $126,639 $132,971 $139,620 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $45,000 $47,250 $49,613 $52,093 $54,698 $57,433 $60,304 $63,320 $66,485 $69,810 ($120,000) $10,000 $12,250 $14,613 $17,093 $19,698 $22,433 $25,304 $28,320 $31,485 $34,810 DCF calculations Outputs Discounted cash flows NPV FIGURE 6.1 ($120,000) $9,091 $10,124 $10,979 $11,675 $12,231 $12,663 $12,985 $13.211 $13,353 $13,421 ($268) Venture NPV estimated based on the expected value of each input The figure shows the computed NPV of the venture that is determined by using the expected value of each item (investment, revenue, fixed cost, variable cost percentage, and growth rate) to project and value future cash flows.