Monte Carlo simulation requires the analyst to estimate the probability distributions of input variables (e.g., sales, variable cost per unit, etc.), and then generate random values representing possible outcomes for each of these input variables. After the process is repeated many times, these variables are used in a simulation model to generate an expected NPV for a project.
Scenario analysis is a technique that requires the analyst to estimate project NPVs over a range of possible scenarios (such as recession, average, boom). The range of NPVs provides evidence concerning the project’s risk. Bootstrapping describes the effect that can occur when a high-growth, high-P/E firm (high P/E) merges with a low-growth, low-P/E firm.
