Bernard?
A: The Simulation tab calculates NPV from the perspective of Mr. Bernard. If you look at the inputs at the top left of the worksheet, Bernard's stake and investment are needed. These are used in the NPV formulas in rows 36 to 39. Please try to understand the formulas.
While this course cannot cover coding for simulations, please do go through the formulas to get an understanding of how optimal action and NPV are being calculated given random outcomes in green cells for Page Views, Conversion Rate, Margin, and Monthly Operating Cost. This does not require any knowledge of simulation. In particular, try to verify
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valuation without and with expansion in cells M29 and M30 expansion criterion in cell B31 value of buyout option in cells M32 and M33 which outcome occurs in cells B36 to B39
NPV in cells C36 to C39
The only thing that simulation part does is it keeps on refreshing the spreadsheet, getting a new set of random numbers in each iteration, and keeps track of the outcomes and NPV in iterations. This is a mechanical step that you don't need to verify. Q2: Secondly, we are a bit unclear on the way in which the decision trees can be applied to this case.
Are we correct in assuming that they can be used to generate an expected value, similar to the simulation only simplified?
A: Decision trees can be very useful in understanding what actions Mr. Bernard should take under what scenarios. See an example at the end of this document. Students aren't expected to do a full‐blown analysis of decision trees. They should however
1. create one or more decision trees to visualize the uncertainties (green circles) and decisions
(lavender squares)
2. calculate Bernard's value in some simple scenarios