Simulation Decomposition: New Approach For Better Simulation Analysis Of Multi-Variable Investment Projects

Abstract

This paper presents a new method to enhance simulation-based analysis of complex investments that contain multi-variable uncertainty. The method is called “simulation decomposition”. Typically the result of simulation-based investment analysis is in the form of histogram distributions - here we propose a method for first classifying the possible outcomes of selected uncertain variables into states and then using combinations of the created states in the decomposition of the simulated distribution into a number of subdistributions. The sub-distributions that can be matched to state-combinations of the variables contain relevant actionable information that helps managers in decision-making with regards to the studied investments. A numerical illustration of a renewable energy investment is used to demonstrate the usability, the enhanced analytical power, and the intuitively understandable benefits that can be reached by using the simulation decomposition method. The proposed method is generally usable and can be utilized independent of the investment context.