Life and the economy are becoming increasingly uncertain. This requires deeper and more complex analysis methods for investments. Besides well known approaches like Discounted Cash Flow Analysis and Decision Tree Analysis we value uncertainty and risk with Monte-Carlo-Simulation and Real Options Analysis. We value
- Investment profitability
- Ranking of investments
- Risks and key drivers
- Real Options
Discounted Cash Flow Analysis
DCF Analysis is the base of every financial valuation. Valid project framing, correct incremental free cash flows, cash flow specific risk-adjusted discount rates and valid key figures are crucial points. This can be very complex in international projects with changing parameters and various uncertainties. I discount each cash flow seperately with its appropriate risk-adjusted discount rate (CCF procedure). NPV (and eNPV including strategic options) is the key figure for value creation and valuation. Decision Tree Analysis evaluates cash flow streams and probabilities of different scenarios. DCF Analysis should always be combined with Monte-Carlo-Simulation and Real Options Analysis.
Monte Carlo Simulation
MC-Simulation is a mathematical technique to estimate the possible outcomes of uncertain events. MC-Simulations have assessed the impact of risk in many real life scenarios, such as in artificial intelligence (AI), stock prices, sales forecasting, project management and pricing. They provide a number of advantages over predictive models with fixed inputs: Sensitivity analysis allows decision makers to see the impact of individual inputs on a given outcome. Correlation analysis allows them to understand relationships between input variables. MC Simulation provides information about what might happen in the future and which parameters are most critical. Hedging, early warning systems and keeping strategic options help to prevent inefficient scenarios and minimize risks. We implement the simulation project-specificly and adjusted to your requirements.
Real Options Analysis
ROA evaluates strategic options of investments and projects with methods of financial option theory. Real options and strategic opportunities can be crucial for success. In businesses with huge uncertainties and when NPV gives not a clear picture, real options are the key factors in evaluation. ROA gives instructions what to do in which situation. Important options are options to wait, expand, contract, choose, switch, abandon, … We also evaluate complex compound and rainbow options.