Let us suppose that presently unimagined is possible, that “the unexpected may happen” (Marshall, 1920, p. 347). Then “human decisions affecting the future, whether personal, political or economic, cannot depend on strict mathematical expectation since the basis for making such...

This paper illustrates how simulation modeling can be employed to support the R&D decision of a pharmaceutical firm. We do this in the context of a simplified but realistic example, where a drug company has just successfully completed the second phase of a three-phase process for assessing the...

In the comparison of NPV profiles of a pair of mutually exclusive projects, it is customary overlay the two NPV Profiles in a two dimensional graph with NPV on the vertical axis and discount rate horizontal axis. The project NPVs are then compared at each feasible discount rate. By having the...

This teaching note provides step-by-step instruction for simulating the net present value and the internal rate of return of a five-year project. The uncertainty lie in the initial level of sales, sales growth rates, gross profit margins, operating expenses before depreciation, and the terminal...

The fundamental rationale for international portfolio diversification is that it expands the opportunities for gains from portfolio diversification beyond those that are available through domestic securities. However, if international stock market correlations are higher than normal in bear...

Limited liability is valuable because it provides equity holders the option to exit when faced with negative cash flows. However, when two firms merge, it is less likely that the aggregate cash flows will be negative since the negative cash flows of one firm may be offset by the contemporaneous...

This note identifies three properties of a risk measure, the acceptance of all of which implies the acceptance of the VaR risk measure; and the rejection of any one of which implies the rejection of the VaR risk measure. First, a risk measure should reflect weak aversion to losses. Second, only...