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Essay / Research Paper Abstract
This 3 page paper accesses two potential contracts for a firm, where there are risks. The decision is discussed looking at the Monte Carlo method and using a decision tree. The bibliography cites 2 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TE2contdt.rtf
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Unformatted sample text from the term paper:
be used. A useful tool if available is the Monte Carlo simulation tool. This is a computer based tool that simulates different scenarios in order to assess the potential outcome
of different scenarios, allowing for a range of different influences, such as economic changes, changes in the workplace etc. When applying the Monte Carlo method to the scenario
there will not be an exact outcome, but the method will be able to look at each individual scenario and calculate the real value of each of the potential contracts.
One contract sees a payment of $155,000 a month over 24 months and one pays $125,000 per month, but has a $1.5 million bonus at the end if all targets
are met. In the Monte Carlo scenario tool there will be an assessment of the potential contracts in order to assess the potential value of each of the contracts,
this may result in the use of net present values, for which we will use a discount factor of 5% for both contracts. The first choice will be shown to
have a net present value of $1,196,869 (when each years revenue is discounted by 5% to allow for inflation) and the second contract where there is a monthly payment of
$125,000 a month but the bonus, using the same discount rate gives a total contract value of $1,886,087. The Monte Carlo Simulation would be able to make more accurate
assessment with the use of variable projections for the rate of inflation. In this it would appear that the second contract is better in the long term, even allowing for
the time cost value of money for the bonus. This may also be used to contrast the outcome of the contract against other contracts that may be gained instead of
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