SIMULATIONS

MONTE CARLO SIMULATIONS (1)

•  Similar to Playing Coins or Dice Many
Times
MONTE CARLO SIMULATIONS (2a)

•  Generating
Random
Numbers
between 0
and 1
•  Calculating
x Using
CDF
MONTE CARLO SIMULATIONS (2b)

•  RV = 0 – 1
•  x = A + RV*(B-A) 1

RV

0
A x B
MONTE CARLO SIMULATIONS (3)
0.382
0.88461
0.863247
0.03238
0.285043
0.371838
0.42616
0.991241
0.705039
0.300211
0.074343
0.487045
0.040712
0.100314
0.809107
0.756157
0.552324
0.970275
0.805658
0.114841
0.986297
0.500778
0.037965
0.584521
0.200476
0.300211
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
0.90405
0.516648
0.789026
0.619404
MONTE CARLO SIMULATIONS (4)
0.382
0.88461
Normal Distribution 0.382
0.88461
4.699768
6.19835
0.863247 Mean = 5, SD = 1 0.863247 6.095023
0.03238 0.03238 3.153089
0.285043 1.0 0.285043 4.432075
0.371838 0.371838 4.673009
0.42616 0.9 0.42616 4.813842
0.991241 0.991241 7.375655
0.705039 0.8 0.705039 5.538948
0.300211 0.300211 4.476205
0.074343 0.7 0.074343 3.555813
0.487045 0.487045 4.967521
0.040712 0.6 0.040712 3.257517
0.100314 0.100314 3.720236
CDF

0.809107 0.5 0.809107 5.874609

0.756157 0.756157 5.693994
0.552324 0.552324 5.131536
0.4
0.970275 0.970275 6.884846
0.805658 0.805658 5.862008
0.3
0.114841 0.114841 3.798821
0.986297 0.986297 7.205688
0.2
0.500778 0.500778 5.001951
0.037965 0.037965 3.225194
0.584521
0.1 0.584521 5.213473
0.200476 0.200476 4.160078
0.300211 0.0 0.300211 4.476205
0.90405 0 2 4 6 8 10 12 0.90405 6.304979
0.516648 0.516648 5.041741
0.789026 x 0.789026 5.803045
0.619404 0.619404 5.303914
 MONTE CARLO SIMULATIONS (5)
0.382 4.699768
0.88461 6.19835 5
0.863247 6.095023
0.03238 3.153089
0.285043 4.432075
0.371838 4.673009 4
0.42616 4.813842
0.991241 7.375655
0.705039 5.538948
0.300211 4.476205 3

Frequency
0.074343 3.555813
0.487045 4.967521
0.040712 3.257517
0.100314 3.720236 2
0.809107 5.874609
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0.756157 5.693994
0.552324 5.131536
0.970275 6.884846 1
0.805658 5.862008
0.114841 3.798821
0.986297 7.205688
0.500778 5.001951 0
0.037965 3.225194
0.584521 5.213473
25

75

25

75

25

75

25

75

25
3.

3.

4.

4.

5.

5.

6.

6.

7.
0.200476 4.160078
0.300211 4.476205
0.90405 6.304979 Bins
0.516648 5.041741
0.789026 5.803045
0.619404 5.303914
USING MS-EXCEL (1)
USING MS-EXCEL (2)
USING MS-EXCEL (3)
USING MS-EXCEL (4)
USING MS-EXCEL (5)
Simple Probabilistic
 SIMPLE EXAMPLE: DICE

•  2 Dice: A = Die #1 + Die #2

SIMULATIONS: 2 DICE
A = (Die No. 1 + Die No.2)
A<7 A = 12
SIMULATIONS No. Samples = 60 3
Total Samples = 100 100
p= 0.6 0.03
THEORETICAL CALCULATION p= 7/12 1/36
0.5833 0.0278

RV1 Die No. 1 RV2 Die No. 2 A A<7 A = 12

0.136265 1 0.306009 2 3 1 0
0.19541 2 0.600391 4 6 1 0
0.85876 6 0.085177 1 7 1 0
0.637135 4 0.079897 1 5 1 0
0.578234 4 0.735679 5 9 0 0
0.409223 3 0.141881 1 4 1 0
0.611133 4 0.920103 6 10 0 0
0.188238 2 0.262886 2 4 1 0
0.508499 4 0.542375 4 8 0 0
0.091098 1 0.106479 1 2 1 0
0.737358 5 0.328867 2 7 1 0
0.056459 1 0.003571 1 2 1 0
0.363964 3 0.403638 3 6 1 0
0.243812 2 0.380444 3 5 1 0
0.895169 6 0.389203 3 9 0 0
0.85638 6 0.915036 6 12 0 1
0.934294 6 0.063875 1 7 1 0
 SIMPLE EXAMPLE: DICE

•  RV1 = 0.136265 à 0 < RV1 < 1/6 à

Value of Die #1 = 1
•  RV2 = 0.306009 à 1/6 < RV2 < 2/6 à
Value of Die #2 = 2
•  A = Value of Die #1 + Value of Die #2 =
1+2=3
•  A ≤ 7? à True à 1
•  A = 12? à False à 0
 SIMPLE EXAMPLE: DICE

•  Same process repeated for 100 times

(see “Total Samples” = 100)
•  From 100 samples à 60 samples
satisfy A ≤ 7? à p = 60 / 100 = 0.6
(theoretical p = 0.5833)
•  From 100 samples à 3 samples satisfy
A = 12? à p = 3/100 = 0.03 (theoretical
p = 0.0278)
 25

20

15
Frequency

Die No. 1
Die No. 2
10

0
1 2 3 4 5 6
Value of Die
 HOW MANY SAMPLES (1)
1 1
0.9
0.8
0.7

Probability A = 12
Probability A<7

0.6
0.5 0.1
0.4
0.3
0.2
0.1
0 0.01
1 10 100 1000 10000 1 10 100 1000 10000
No. Samples No. Samples
 HOW MANY SAMPLES (2)

Rule of Thumb: 1

As a Minimum =
10 Samples Meeting

Probability
Criterion
0.1

Total No. Samples >

10 × (1 / Probability)
0.01

More Samples à 1 10 100 1000 10000

No. Sample Meeting Criterion
Better Typically
Engineering Economy
 Benefit / Cost Ratio
Design A Design B
Initial Investment* (4,074,088) (426,209)
Annual Maintenance (1,500,000) (150,000)
Total (5,574,088) (576,209)

Annual Benefits 6,500,000 650,000

Benefit/Cost Ratio 1.17 1.13

Both Alternatives Economically Feasible

* Note:
Initial Investment = (40,000,000) (4,000,000)
i= 8% 4%
n= 20 12
Annual Worth = (4,074,088) (426,209)
 Initial Rate Annual Annual Annual Annual B/C Ratio
Investment Worth Maintenance Cost Benefit
Min = 36000000 6.00% 1350000 5850000
Max = 44000000 10.00% 1650000 7150000 Prob of Failure
0.06

Average = 39975895 8.02% 4086120 1510867 5596987 6571531 1.183707

Min = 36113773 6.02% 3187186 1351492 4642614 5860633 0.906326
Max = 43923582 9.90% 4978663 1647977 6504055 7148334 1.481975

0.382 0.101 0.596 0.899 39056001 6.40% 3517241 1528945 5046186 7018838 1.390919 0
0.014 0.407 0.863 0.139 36115970 7.63% 3577709 1608974 5186683 6030160 1.162623 0
0.032 0.164 0.22 0.017 36259041 6.66% 3331766 1415883 4747649 5872217 1.236868 0
0.554 0.357 0.372 0.356 40429090 7.43% 3944536 1461551 5406087 6312282 1.167625 0
0.426 0.304 0.976 0.807 39409284 7.22% 3782525 1642712 5425238 6898665 1.271588 0
0.952 0.053 0.705 0.817 43613514 6.21% 3868671 1561512 5430182 6911480 1.27279 0
0.3 0.75 0.351 0.776 38401685 9.00% 4207016 1455445 5662461 6858356 1.211197 0
0.064 0.358 0.487 0.511 36512467 7.43% 3563465 1496113 5059579 6514580 1.287574 0
0.041 0.231 0.005 0.926 36325694 6.92% 3408363 1351492 4759855 7053989 1.481975 0
0.776 0.68 0.809 0.724 42205512 8.72% 4531116 1592732 6123848 6791624 1.109045 0
0.756 0.627 0.174 0.405 42049257 8.51% 4445346 1402095 5847441 6376237 1.090432 0
0.555 0.181 0.97 0.687 40441298 6.72% 3736059 1641082 5377141 6743023 1.254016 0
0.806 0.262 0.178 0.867 42445265 7.05% 4021760 1403386 5425146 6976783 1.286008 0
0.762 0.738 0.986 0.926 42092471 8.95% 4595839 1645889 6241728 7053275 1.13002 0
0.501 0.675 0.49 0.146 40006226 8.70% 4289219 1496947 5786166 6039523 1.043787 0
0.672 0.732 0.585 0.152 41372478 8.93% 4508568 1525356 6033924 6047894 1.002315 0
 Benefit / Cost Ratio (line1)
•  RV1 = 0.382 à Initial Investment = 36M + RV1*8M =
39.1M
RV2 = 0.101 à Rate = 6% + RV2*4% = 6.4%
Annual Worth = PMT(Rate,20,-Initial Investment) =
3.52M
•  RV3 = 0.596 à Annual Maintenance = 1.35M +
RV3*0.3M = 1.53M
•  Annual Cost = 3.52M + 1.53M = 5.05M
•  RV4 = 0.899 à Annual Benefit = 5.85M + RV4*1.3M
= 7.02M
•  B/C Ratio = 7.02M / 5.05M = 1.39
•  B/C Ratio > 1.0 à Not fail = 0
 Benefit / Cost Ratio
•  Same process repeated for 100 times
(see “Total Samples” = 100)
•  Simulation: B/C Ratio = 1.18
Theoretical: B/C Ratio = 1.17
•  From 100 samples à 6 samples do not
satisfy B/C Ratio ≥ 1.0 à probability of
failure = 6 / 100 = 0.06
[THIS CAN’T BE OBTAINED FROM
DETERMINISTIC ANALSIS]