Simulation:
The word simulation means, "To assume the mere appearance of without the reality". The technique uses random numbers and is used to solve problems, which involve conditions of uncertainty. In this technique we adopt following procedure:
(i) At first random numbers are allotted to the different probabilistic estimates of cash flows.
(ii) After that, set of random numbers are generated.
(iii) The value of cash flows for each set of random numbers is calculated. Which is itself based on the random numbers originally allotted to those probabilistic estimates?
(iv) After doing this, we will have different cash flows for each set of random numbers. Net Present value for each set will be calculated.
(v) The sum of Net present value of all sets is divided by number of set. The result will be Net present value of project.