A Comprehensive Methodology for Investment Project Assessment Based on Monte Carlo Simulation

Abstract

This article presents a methodology for assessing investment projects representing the sequence of steps necessary for a comprehensive assessment and optimization of an investment project. The assessment process starts with the quantitative forecasting of stochastic input factors, with the selection of risk factors and the definition of their uncertainty. That is followed by the design of a mathematical model for calculating the criterion of economic efficiency of investment, its calculation mathematically, and forecasting by Monte Carlo simulation. The simulation output is assessed from the point of view of risk, and in case of an unacceptable result, the possibilities for project optimization are proposed. Finally, the proposed methodology was applied to an investment project model, where individual principles are practically demonstrated.