THE USE OF SIMULATIONS IN INVESTMENT DECISION-MAKING AND FINANCING

Abstract

The economic efficiency and financial stability of a significant investment project can directly affect the success and long-term viability of the company. The proposed approach innovatively integrates Monte Carlo simulation techniques into traditional investment and financing decision-making. The investment assessment is based on simulations. The evaluation process begins by determining the economic efficiency of the project and its financial stability using the financial criterion Net Present Value (NPV) for different project financing variants – expressed by different ratios between own resources and external resources. This is followed by a risk assessment of the input variables affecting the NPV. The profitability is maximized by optimizing the production program using the OptQuest tool. The maximum loan interest rate using simulations at different interest rates is determined in the last step. The proposed approach is practically unknown and not applied in business practice. The risk assessment inclusion in investment decision-making and long-term financing should become an integral part of business practice.