Overview

A traditional sensitivity analysis involves testing a limited number of scenarios (e.g. base, upside and downside). Each scenario is a set of predefined inputs. This approach shows the outcomes of the model at various perspectives, but does not give a precise likelihood of a particular result to happen.

In contrast, the Monte Carlo method tests a large number (several hundreds or thousands) of ‘scenarios’ in which the inputs are drawn as random numbers. The results of the model (gross profit, IRR etc.) are also represented by ranges of numbers. Analyzing statistical patterns of those ranges the analyst can determine mathematically the chances of an output being within a specific range or being higher or lower than a certain threshold.

In this publication I am sharing a technique of Monte Carlo analysis in Excel. My approach is based on standard Excel functions and data tables without macros. The accompanying model performs essential Monte Carlo simulation: drawing random numbers of certain distribution types, making correlations, interpreting the outcomes.

No reviews yet

## More From Andrei Okhlopkov

Browse our top rated business templates. See All
Startup Cap Table
442
24
Most startups are initially financed by their founders. They contribute relatively small amounts of money for the company to make…
Cap Table with Investor Returns, Derivative Instruments and Charts
462
0
Most startups are initially financed by their founders. They contribute relatively small amounts of money for the company to make…
Cost-Volume-Profit (Breakeven) Analysis
645
51
Cost-Volume-Profit analysis is one of the fundamental types of analysis which deals with product profitability. It classifies the costs into…
“Budget-versus-Actual” Charts
500
1
This file contains magazine-quality charts in Excel to illustrate variances between budgeted and actual figures.  Professionally designed charts in business…
Due Diligence Tools and Methods
1,035
2
A prospective investor is concerned about the target’s: 1. Quality of earnings 2. Adequacy of working capital 3. Unrecorded or…
Van Westendorp’s Pricing Method
1,323
0
Introduced in 1976, this method has now become one of the most popular approaches to perform pricing analysis. The method…
See All