Track: Simulation Competition

Abstract

Net Present Value (NPV) is an important financial metric for the purposes of accepting or rejecting Projects in the Corporate Environment. The authors advocate limited free NPV applications available to the Management and Commerce Student or the Corporate Finance practitioner.

The proposed application enables the analysis of NPV when factors such as Cost of Goods Sold to Sales Ratio; Capital Expenditure to Sales Ratio; Selling, General and Administrative Expense to Sales Ratio; Sales Growth Rate, and Depreciation to Sales Ratio are available as inputs. Further, the parameters like Corporate Tax Rate with the number of Years until Constant Growth and Firm Risk Level proxied by the Weighted Average Cost of Capital (WACC) are deemed available as inputs for the simulation. Moreover, the user is able to obtain up to 5,000 simulations in a reasonable time frame, with a machine running MS Excel 2019 and having 8 GB of RAM available. The approximate run-time for 5,000 simulations is less than one minute. Several useful outputs can be derived from the simulation of the proposed application. First, a graph of each of the distributions pertaining to the input variables is displayed. The User can select the type of distribution for each input variable, namely: Normal Distribution, Triangular Distribution, and Uniform Distribution. In addition, a Base Case NPV is also computed for a set of Base Case input variables.

By virtue of the attained cumulative probability NPV diagram, the User can easily determine the probability of whether NPV is less than or equal to a certain value. In addition, a sensitivity table is provided in the proposed application which displays the impact of input variables in the descending order based on the attained stochastic NPV results.