Sunset Company: Risk Analysis For Capital Budgeting Using Simulation And Binary Linear Programming

Abstract

The Sunset Company case illustrates how the study of linear programming and risk analysis are facilitated with popular spreadsheets and their simulation add-ins. From new products having a singular expected value for NPV, binary linear programming (BLP) optimally selects the combination of products that maximizes total NPV given capital constraints. Yet, when probability distributions are used to model risk of the products, an optimized simulation finds a different set of products for a risk adverse strategy. Advances in spreadsheet technology facilitate accounting educators introducing meaningful modeling and risk analysis into the classroom.