Why do financial planners use Monte Carlo simulations in comparing
capital projects.  Why not simply use the mean of the distributions
for each variable and go with that? Please provide a link to a webpage
or paper which discusses the 'needs' for Monte Carlo in contrast to a
simplistic approach.

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Clarification of Question by googqs-ga on 22 Oct 2003 19:08 PDT

Good sites, one of which I had found.

I guess what I am looking for is a semi-authoritative comment about
the fact that monte carlo simulation runs because there is no way to
computationaly mesh all the distributions for the variables in a
linear equation to have the equation's resulting distribution.

e.g. in the equation     f() = x^2 + y/(1-x) + (x*z)

If we know the distributions for x,y,z. Is monte carlo the only way to
calculate a distribution for f()?

[There are two links.  First a general overview, but not from a
capital budget perspective, and then a general overview from an
accounting perspective.  The second link was a footnote in the first
paper, but the link given was invalid (mistyped).  I've included a
corrected working link here.]

http://www.fpanet.org/journal/articles/2001_Issues/jfp1101-art12.cfm

At this point, Monte Carlo simulation is not generally used by
financial planners [McCarthy, 2000] nor has there been a strong case
put forward to encourage such use.

Rubinstein [1981] echoes Myers’ sentiments and develops a set of
criteria to be used in deciding whether it is appropriate to use Monte
Carlo simulation. Monte Carlo simulation is appropriate when
It is impossible or too expensive to obtain data 
The observed system is too complex 
The analytical solution is difficult to obtain 
It is impossible or too costly to validate the mathematical experiment


[Chau and Nordhauser [1995] provide a good overview of articles using
Monte Carlo in accounting and capital budgeting research. They found
that Monte Carlo simulation has been found useful wherever data are
not available, but they found no articles supporting its use with
financial market returns.


http://www.swlearning.com/accounting/jac/jac11/jac11_article3.html