Health Services Administration

sing Monte Carlo Simulation To Make Better Capital Investm Gapenski, Louis C. Hospital & Health Services Administration; Summer 1990; 35, 2; ABI/INFORM Global pg. 207
Using Monte Carlo Simulation to Make Better Capital Investment Decisions
Louis C. Gapenski is Assistant Professor, Department of Health Ser-vices Administration, University of Florida, Gainesville, and is a Faculty Associate of the College.
Summary The financial analysis of a proposed capital investment typically involves es-timating the project’s expected cash flows and profitability and then perhaps looking at one or two alternative scenarios. However, this procedure provides incomplete information about a project’s potential risk/return characteristics because it focuses on only a few possibilities; whereas, real-world investments can have an almost unlimited number of financial outcomes. Monte Carlo simulation can solve the incomplete information problem. In a Monte Carlo simulation, relatively certain input variables are specified by single values, while relatively uncertain variables are specified by probability distributions. The end result is a probability distribution that describes the project’s full range of potential profitability. With a complete set of information concerning a project’s risk/return characteristics, decision makers can better judge the financial impact of the investment and hence make better capital investment decisions.
Address correspondence and requests for reprints to Louis C. Gapenski, Ph.D., Assistant Professor; Department of Health Services Administration, J. Hillis Miller Health Center, Box J-195, University of Florida, Gainesville, FL 32610.
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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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