The Monte Carlo simulation:
A)Involves making assumptions that specify the shapes of the probability distributions for each future cash flow in a capital budgeting project.
B)Is an approach that involves the use of numbers drawn randomly from probability distributions.
C)is a computer simulation which calculates NPV based on random observations for each of a project's cash flows.
D)All of the above

Question

The Monte Carlo simulation:
A)Involves making assumptions that specify the shapes of the probability distributions for each future cash flow in a capital budgeting project.
B)Is an approach that involves the use of numbers drawn randomly from probability distributions.
C)is a computer simulation which calculates NPV based on random observations for each of a project's cash flows.
D)​All of the above

Quizplus · Accepted Answer

The Monte Carlo simulation involves making assumptions about the probability distributions for each future cash flow, generating random numbers from those distributions, and using those numbers in a computer simulation to calculate the project's net present value. Therefore, all the given choices are correct.

The Monte Carlo Simulation