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variables. Then the process is repeated to generate new P/L outcome scenarios. All
of this is managed by the macro that automatically makes the random selection,
calculates new Net Income , and records the Net Income to a worksheet called Data
Collection Area . The appropriate number of scenarios, or iterations, for this process
is a question of simulation design. It is important to select a number of scenarios
that reflect accurately the full behavior of the Net Income. Too few scenarios may
lead to unrepresentative results, and too many scenarios can be costly and tedious to
collect. Note that the particular scenario in Exhibit 1.6 shows a loss of 2.97 million
dollars. This is a very different result from her simple analysis in Exhibit 1.2, where
a profit of over $1,000,000 was presented. (More discussion of the proper number
of scenarios can be found in Chaps. 7 and 8.)
In Exhibit 1.7, Graph-Risk Profile , simulation results (recorded in the Data
Collection Area shown in Exhibit 1.8) are arranged into a frequency distribution
by using the Data Analysis tool (more on this tool in Chaps. 2, 3, 4, and 5) available
in the Data Tab. A frequency distribution is determined from a sample of variable
values and provides the number of scenarios that fall into a relatively narrow range
of Net Income performance; for example, a range from $1,000,000 to $1,500,000.
By carefully selecting these ranges, also known as bins, and counting the scenarios
falling in each, a profile of outcomes can be presented graphically. We often refer
to these graphs as Risk Profiles . The title is appropriate given that the client is pre-
sented with both the positive (higher net income) and negative (lower net income)
risk associated with the adoption of the flour tortilla product line.
It is now up to the client to take this information and apply some decision criteria
to either accept or reject the product line. Those executives that are not predisposed
to adopting the product line might concentrate on the negative potential outcomes.
Note that in 46 of the 100 simulations the P/L outcome is a loss, with a substantial
down side risk—31 observations are losses of more than 2 million dollars. This
Exhibit 1.7
Improved workbook—graph-risk profile
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