Pros and cons of simulation technique, Financial Management

Assignment Help:

Pros and Cons

Simulation technique allows experimentation with a model of the real life system. Whenever experimenting with the system itself is risky and/or costly, simulation helps in forming a fair idea of the outcome of changes in certain variables. Usually, after constructing the model of a system, one or more input variables are varied for each successive experiment. This would help in the recognition of the major parameters governing the system and proper measures can be taken to improve the overall performance of the system.

Simplifications and assumptions usually required in analytical approaches, are not required for simulation. Hence, managers can easily understand and appreciate simulation. Simulations can also be used to break down complex systems into sub-systems and study the behavior of each of these sub-systems individually or jointly with other sub-systems.

Another advantage of the simulation approach is its flexibility. Extremely complex systems with uncertainty can be studied with a reasonable degree of accuracy. Note that reliability of the results - whether from simulation or analytical approach - depends crucially on how well the mathematical model represents the real system.

The main disadvantage of simulation is that it is very computer-intensive. Large blocks of expensive computer time may be necessary even for a relatively simple problem. This is particularly true when a large number of runs are required to ensure a reasonable degree of accuracy.

Another drawback is that it does not produce optimal solutions. As the number of parameters increases, the difficulty in finding the optimum values increases to a great extent.

Finally, in terms of information requirements to formulate a reasonable model, the simulation approach is not very different from the analytical approach. While uncertainty can be built into a simulation model, most of the times a simplistic model may be used.

The simulation approach has found extensive applications in the area of business decision making. Some examples are, investment appraisal under uncertainty, analysis of performance of portfolios, waiting line problems, corporate financial models, corporate planning, inventory decisions, etc. Any complex system about which the investigator has sufficient knowledge in terms of interrelationship of variables can be tackled with this approach.

 


Related Discussions:- Pros and cons of simulation technique

Types of rating - individual/borrower rating, Individual/Borrower Rating ...

Individual/Borrower Rating This includes rating a borrower to whom a loan/credit facility may be sanctioned.

Define banks like to make short-term, Banks like to make short-term, self-l...

Banks like to make short-term, self-liquidating loans to businesses.  Why? Banks like to be capable to see where the funds are similarly to come from like the borrower is able to

Premium, The amount by which the market price exceeds the conversion ...

The amount by which the market price exceeds the conversion value or the investment value called the premium. When expressed as a percentage, it is given by,

Effective annual rate, You are interested in saving money for your first ho...

You are interested in saving money for your first house. Your plan is to make regular deposits into brokerage account which will earn 14%. Your first deposit of $5,000 will be made

Stabilization policies in the aa-dd model, Stabilization Policies in the AA...

Stabilization Policies in the AA-DD Model. Suppose the economy of Zion has reached the long run equilibrium (i.e. full employment). Now assume that a best-seller, written by Ne

Decision making, Write a report to the Board of Directors of Solvent Ltd to...

Write a report to the Board of Directors of Solvent Ltd to analyse the performance of companies X and Y and to give recommendation as which of those two investment opportunities is

Advantages of floating rate notes, Advantages of Floating rate notes: W...

Advantages of Floating rate notes: We know that the coupon rate is fixed for fixed rate bonds and that throughout its tenure the investor receives coupons at a predetermined in

Modern approach, Meaning merits nd demerits of modern approch of financial ...

Meaning merits nd demerits of modern approch of financial management

Bankruptcy and bondholder rights, The holder of a corporate debt inst...

The holder of a corporate debt instrument is preferred to equity shareholders in the bankruptcy proceedings. However, secured/senior creditors are preferred to no

Calendar studies, Calendar Studies These attempted to predict rates of ...

Calendar Studies These attempted to predict rates of return during a calendar year and examine if there is any particular observable pattern in the rates of return on the stock

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd