ABSTRACT
The principal means by which uncertainty and/or risk may be utilized in a practical way is by applying simulation, using in the Monte Carlo method. A single appraisal example is used to demonstrate various aspects of this approach in more detail. For this purpose a computerized model of typical appraisal has been developed. A development appraisal is a standard spreadsheet application, and a modern spreadsheet package, associated with a reasonably powerful PC, can cope easily with the calculations involved in any development appraisal. The simulation models are 'driven' by specially prepared Visual Basic modules that control the Monte Carlo sampling process, insert the sampled values into the cash flow model, and assemble the results for samples of various sizes. Spreadsheets prepared in Microsoft EXCEL have been used to carry out a Monte Carlo simulation on a cash flow development appraisal.
