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

State about the two types of government securities, State about the two typ...

State about the two types of Government Securities There are two types of Government Securities which are offered: Government Floating Rate Bonds which pay a floating rate

Money market mutual funds (mmmfs), Since the operations in the money ...

Since the operations in the money market are dominated by institutional players, the retail investor's participation in the market seems to be limited. To overcom

Explain hard capital rationing and soft capital rationing, Explain Hard cap...

Explain Hard capital rationing and Soft capital rationing The NPV decision rule to admit all projects with a positive net present value requires the existence of a perfect cap

Accrued dividend, It is an accounting term which refers to the balance shee...

It is an accounting term which refers to the balance sheet item that accounts for dividends that have been confirmed but not yet given to shareholders. Accrued dividends are taken

Collection of amounts due - account receivable management, Preferably all c...

Preferably all customers will settle within the agreed terms of trade. If this doesn't happen a company needs to have in place agreed procedures for dealing with overdue accounts.

Define a currency futures contract, Q. Define a currency futures contract? ...

Q. Define a currency futures contract? A currency futures contract is a standardised contract for the buying or else selling of a specified quantity of currency. It is traded o

Reinvestment income, Other than zero coupon bonds, all fixed in...

Other than zero coupon bonds, all fixed income securities make periodic payments in the form of coupon interest. This coupon interest can be rei

Estimate financing types and requirements, This case provides the opportuni...

This case provides the opportunity to match financing alternatives with the needs of different companies. It allows the reader to demonstrate a familiarity with different types

How cash flow problems arise, Q. How cash flow problems arise? It is si...

Q. How cash flow problems arise? It is significant first to distinguish between profitability and cash availability. The key scheme relates to insolvency since even profitable

Define floating rate notes, Define Floating Rate Notes Floating-rate n...

Define Floating Rate Notes Floating-rate notes (FRNs) are commonly medium-term bonds along with their coupon payments indexed to some reference rate.  Common reference rates a

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