Risk Analysis and Uncertainties in Capital Investment Appraisal: Application of Monte Carlo Simulation

Every business decision involves risk and decision-making has become increasingly more complex today because ofrmcertainty. Since capital investmem is a long-term function, it becomes obvious that the further into the future plans are made the more uncertain are the outcome. It is expected that only top managemem will be equipped with tire management skills to predict the flllure with some degree of confidence and certainty. One way through which the management can predict the future of the outcome with some degree of confidence and certainty is through Monte CArlo simulation. Monte (Arlo simulation is a tool that shows the possible outcome based on certain key characteristics or behaviors of a system using random numbers. The paper has shown that Monte Carlo simulation enables the management predict the outcome of wrong estimates and prepare their minds better about the possible losses that may occur and thus concrete plans can be put in place to minimize the effects ofsuclr possible losses if they occur as a result of inaccurate estimates in key variables. The paper concludes that overlooking significaJrt interrelationships among the projected variables can distort the results of risk analysis and lead to misleodingconclusionr. The paper recommended that organizations should send their staff on training to upgrade their skills to enable them implement Monte Carlo simulation which will enablemww.gement make an informed decision on capital Investment decisions