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Reply#1 and #2: Post provides specific and constructive feedback or adds additional information, meeting the length requirement of 150 words.

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Reply #1: Simulation analysis is “used to predict the probability of different outcomes when the intervention of random variables is present” (Kenton 2021). Scenario analysis estimates the expected value of a portfolio after a given period of time. While both of these are methods to help assess risk, scenario analysis assesses the effect of changing all variables in the scenario at the same time. This means that scenarios will either be the best case or worst case scenarios because either everything goes bad together or everything goes good together. For simulation analysis, random values for the variables are entered into the model, and the NPV is calculated for those sets of variables (Brigham 2018 p.551). Simulation analysis takes an average of the possible outcomes to convey riskiness.

Each technique has its own way to evaluate project riskiness. Scenario analysis is the best technique to provide the best-case and worst-case scenarios for each scenario. The simulation analysis has a chance to provide the best and worse case scenarios, but since the variables are chosen at random this most likely will not happen. While both are helpful techniques, simulation analysis assumes perfectly efficient markets. This is better for large projects and to find the “likelihood that an asset price will move in a certain way” (Kenton 2021). Scenario analysis is best for investment strategies in addition to corporate finance.

Reply #2: Our text described a simulation method called Monte Carlo Simulation.  A simulation is set up so that all input variables have a probability distribution list (Brigham, 2018, p. 551).  The simulation will pick a random value for the variables, enters them into the model, and calculates the NPV for that set of input variables (Brigham, 2018, p. 551).  This process repeats many times over, and each time the system saves the calculated NPV (Brigham, 2018, p. 551).  Once complete, the set of NPV numbers are averaged to calculate the expected NPV of the project along with the standard deviation of the project in order to measure risk (Brigham, 2018, p. 551).

Scenario analysis is based on a similar idea of evaluating multiple input changes, but works with a much smaller set of probability assignments, often using a base case (or the most likely option), best-case options, and worst-case options (Brigham, 2018, p. 547).  The base/best/worst scenarios are each given a probability weighting (Brigham, 2018, p. 547).  Input is sought from managers to help define the input data to be used for each probability scenario (Brigham, 2018, p. 547).  The scenarios are run based on the input set created for each, resulting in a NPV for each scenario, which is multiplied by the probability for that scenario (Brigham, 2018, p. 549).  These are added together to get the expected NPV for the project (Brigham, 2018, p. 549).

Scenario analysis would be more likely to give very good best-case numbers and very bad worst-case numbers.  This is because in scenario analysis all of the input variables are set to the most positive options for best-case, and the most negative options for worst-case (Brigham, 2018, p. 550).  The Monte Carlo simulation might tap into these as well.  However, since this method is based on using random inputs, the chances of every variable being set to the absolute best and worst input options is very unlikely.  In the examples shown by our text, both methods came to the same conclusion about risk, even though the number values that resulted were different.  Both showed a large variability between potential gain and loss, which indicates a higher risk project (Brigham, 2018, p. 554).  An article on Investopedia.com pointed out that the Monte Carlo simulation is actually disadvantaged when it comes to accounting for the risk of bear markets, and that it will likely underestimate the impact in this event (Agarwal, 2022).  So, while this method is very useful for running a large number of options, one must still understand that the results are not perfect, and should be used in conjunction with all information available as well as the analyst’s use of judgment.

Reply #3 and #4: Posts provide specific, constructive, and supportive feedback. Posts add substantially to the discussion.

Utilizes the text or at least one outside source in support of answers and sources are cited.

For any resources, provides accurate in-text citations and a reference list with the most current edition of APA style.
No more than ¼ of the posting is a quote.

Reply #3: Foreign direct investment is, “Purchase of physical assets or a significant amount of the ownership (stock) of a company in an-other country to gain a measure of management control.” (Wild 176).

There are many decisions that organizations need to make when considering FDI. There are many benefits, however there are many downfalls as well. Some major benefits are things such as: Economic Growth, increase in capital, and growth in capital flow. On the downside, FDI comes with risks, such as; risk of political changes (that would impact business), higher cost, and economical non-viability.

Management has numerous issues that they will encounter, one major one being control. When operating an FDI they will lack control and that could be difficult. Going with lack of control, production cost can be much higher, this would hurt the overall production of the company, and their ability to grow. Lastly, the overall cost of operations will be higher in these types of companies.

Reply #4:     According to our eText, foreign direct investment is “the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country in order to gain a measure of management control” (Wild and Wild, 2017). The other article describes it as “With FDI, foreign companies are directly involved with day-to-day operations in the other country. This means they aren’t just bringing money with them, but also knowledge, skills, and technology” (Business Standard, 2021). With all there is to consider before deciding to engage in FDI, there are important management issue factors that must be considered. These are control, partnership requirements, and purchase-or-build decision. Control is the biggest one, I believe, simply because “many companies investing abroad are greatly concerned with controlling the activities that occur in the local market” (Wild and Wild, 2017). Companies try to gain the most control to feel like they are on top. The government can have complete control over the business which can make it hard for the company to have the most control. Partnership requirements is an issue because when dealing with most partners, you have to be on the same page, especially business wise. Sometimes the country will demand shared ownership which can make it difficult since “in the past, IBM strictly required that the home office own 100 percent of all international subsidiaries” (Wild and Wild, 2017). Finally, purchase-or-build decision. “Another important matter for managers is whether to purchase an existing business or build a subsidiary abroad from the ground up” (Wild and Wild, 2017). Depending on the reputation of the company built, it can be a good or bad thing.

The levels of economic integration are as follows: free trade area, custom union, common market, economic union, and political union. Free trade is the easiest level and will help promote FDI. Next is customs union, which is the same, but this includes nonmembers. Common market is the same but includes free movement of labor and capital. Economic union requires “…set a common trade policy against nonmembers and coordinate their economic policies” (Wild and Wild, 2017). Lastly, political union which is the hardest level and includes “economic and political integration whereby countries coordinate aspects of their economic and political systems” (Wild and Wild, 2017).

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