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Lesson 7 - UsingCrystalBall Inmanyspreadsheets, Asaresult,...

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Introduction to Simulation  Using Crystal Ball
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Introduction to Simulation In many spreadsheets, the value for one or more cells  representing independent variables is unknown or uncertain.   As a result, there is uncertainty about the value the dependent  variable will assume: Y = f (X 1 , X 2 , …, X k ) Simulation can be used to analyze these types of models.
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Random Variables & Risk random variable  is any variable whose value cannot be predicted or set  with certainty. Many “input cells” in spreadsheet models are actually random variables. the future cost of raw materials future interest rates future number of  employees in a firm expected product demand Decisions made on the basis of uncertain information often involve risk. “Risk” implies the potential for loss.
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Why Analyze Risk? Plugging in expected values for uncertain cells tells us nothing about the  variability of the performance measure we base decisions on. Suppose an $1,000 investment is expected to return $10,000 in two years.   Would you invest if... the outcomes could range from $9,000 to $11,000? the outcomes could range from -$30,000 to $50,000? Alternatives with the same expected value may involve different levels of  risk.  
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Methods of Risk Analysis Best-Case/Worst-Case Analysis What-if Analysis Simulation
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Best-Case/Worst-Case Analysis Best case - plug in the most optimistic values for each of the  uncertain cells. Worst case - plug in the most pessimistic values for each of  the uncertain cells. This is easy to do but tells us nothing about the  distribution  of  possible outcomes within the best and worst-case limits.
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Possible Performance Measure Distributions Within a Range worst case best case worst case best case worst case best case worst case best case
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What-If Analysis Plug in different values for the uncertain cells and see what  happens. This is easy to do with spreadsheets.
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