A capital budgeting stochastic simulation model applied in the banking industry

Abstract

Outlines the reasons for using stochastic simulation rather than other methods for this development of a capital budgeting model to quantify the risk and uncertainty connected with establishing a new bank branch. Uses net present value (NPV) and the internal rate of return (IRR) as the profit criteria, explains the variables included in the model, expresses them as mathematical equations and determines probability distributions for those which are random. Compares the results of 5,000 iterations of the simulation for NPV/IRR values and with the evaluation criteria used by the sample bank. Shows that the model gives a better indication of the risk involved in the project.

Citation

Artikis, P.G. (1999), "A capital budgeting stochastic simulation model applied in the banking industry", Managerial Finance, Vol. 25 No. 8, pp. 1-11. https://doi.org/10.1108/03074359910766073