LaVar, Inc. has obtained probability estimates from its production and sales departments regarding the costs and selling prices it can anticipate for a new product line. The company is uncertain as to which combination of costs and selling prices will occur. The best method for determining the expected outcome of the investment, based on an assumed probability distribution associated both sales and costs, is:
A) Monte Carlo simulation (MCS).
B) The analytic hierarchy process (AHP).
C) Correlation analysis.
D) Multiple regression analysis.
E) Linear programming.

Question

Quizplus · Accepted Answer

Monte Carlo simulation (MCS) is the best method for determining the expected outcome of an investment based on probability distributions associated with sales and costs. MCS uses random sampling techniques to generate thousands of possible outcomes based on different combinations of sales and cost probabilities. This provides a range of possible outcomes and their likelihood, which can help in decision-making and risk analysis.