New Approaches to Project Risk Assessment Utilizing the Monte Carlo Method

Abstract

An environment of turbulence in the market in recent years and increasing inflation, mainly as a result of the post-COVID period and the ongoing military operation in Ukraine, represents a significant financial risk factor for many companies, which has a negative impact on managerial decisions. A lot of enterprises are forced to look for ways to effectively assess the riskiness of the projects that they would like to implement in the future. The aim of the article is to present a new approach for companies with which to assess the riskiness of projects. The basis of this is the use of the new Crystal Ball software tool and the effective application of the Monte Carlo method. The article deals with the current issues of investment and financial planning, which are the basic pillars for effective management decisions with the goal of sustainability. The article has verified a methodology that allows companies to make effective investment decisions based on assessing the level of risk. For practical application, the Monte Carlo method was chosen, as it uses sensitivity analysis and simulations, which were evaluated for two types of projects. Both simulations were primarily carried out based on a deterministic approach through traditional mathematical models. Subsequently, stochastic modeling was performed using the Crystal Ball software tool. As a result of the sensitivity analysis, two tornado graphs were created, which display risk factors according to the degree of their influence on the criterion value. The output of this article is the presentation of these new approaches for financial decision-making within companies.