Selection of Optimal Investment Variant Based on Monte Carlo Simulations

Abstract

This paper presents a methodology for the selection of an optimal investment variant using Monte Carlo simulation and OptQuest optimization. The decision-making process also includes risk analysis. Investment variants involve renewal and development of production equipment. Two approaches to investment decision making are introduced. The first approach is based on the analysis of the distribution function of Net Present Value (NPV), and the rule of mean value and coefficient of variation is used as the decision criterion for determining the profitability of investment variants. The second approach, based on the cumulative probability distribution of NPV, provides a comparative assessment of the investment variants using stochastic dominance rules. Both approaches lead to the choice of the same investment variant. In order to increase the profitability of the selected investment variant and reduce its risk, OptQuest optimization is subsequently implemented. The introduced approaches can be a useful support tool in investment decision-making.