Modeling of Risk using

Monte Carlo Simulation

Real-Estate Project Case for PAF

Saurabh Ashok Thadani 10FN-102

Srikanth Kumar Konduri 10FN-109
Tushar Gupta
10FN-115
Nikhil Gupta
10FN-121

Project Overview
Township

project at Mullanpur,
Chandigarh
Project tenure = 6 years
Financials based on projections:
Total Cost = Rs. 1126.14 Cr (base case)
Total Revenue = Rs. 1348.87 Cr (base case)
Means

of Finance

Equity = Rs. 60 Cr
Debt = Rs. 60 Cr
Sales & Advances from Customer = Rs.
1006.14 Cr

Objective
Modelling

the risk associated

with cost of construction based
on variation in the following
factors:

Cement prices
Iron & Steel prices
Labor wages
Inflation rate (WPI)
Interest rate (Risk-Free rate)

Cost Distribution

% contribution of each factor to the total cost of constructio

Cement

Iron & Steel

Labour

7%

Miscellaneous

28%

26%

39%

* Estimated based on past projects data

Forecasting of Cement Prices

Source : CMIE

Estimation
Equation:
Y = 0.0029X +
2.1103

Forecasting of Iron & Steel Prices

Source : CMIE

Estimation
Equation:
Y = 29.869e0.001X

Historical WPI
Source : Business
Beacon, CMIE

Estimation
Equation:
Y = 116.26e0.043X

Historical Minimum monthly

wage rates
Source :
labourbureau.nic.in

Estimation
Equation:
Y=
173.89X+1167.9

Historical Yield on
10-year GOI Security
Source : Business
Beacon, CMIE

Estimation
Equation:
Y = 0.7437ln(X)
+4.8192

Sensitivity Analysis
By

varying Cost & Sales forecast

Sales
Price
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%

Cost
Price
-5%

-2%

20.06%
20.89%
21.70%
22.48%
23.24%
23.98%
24.70%
25.40%
26.09%
26.75%
27.40%

18.89%
19.76%
20.61%
21.42%
22.21%
22.98%
23.73%
24.46%
25.16%
25.85%
26.53%

2%

5%

18.08%
18.98%
19.85%
20.69%
21.51%
22.30%
23.06%
23.81%
24.53%
25.24%
25.92%

17.25%
18.18%
19.07%
19.94%
20.78%
21.59%
22.38%
23.14%
23.88%
24.61%
25.31%

15.95%
16.92%
17.86%
18.77%
19.65%
20.49%
21.31%
22.11%
22.88%
23.63%
24.36%

Monte Carlo Simulation Inputs :

For Commercial-Sector Level Shopping

Mean=420
22.63

Mean=585
53.54

Std. Dev. =

Std. Dev. =

Mean=390
29.34

Std. Dev. =

Mean=105
9.83

Std. Dev. =

IRR Forecast Summary

Entire

range is from 17.91% to

25.61% Base case is 22.30%
After 1,00,000 trials, 63%
probability of achieving an IRR
>22%
Percentile
s
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%

Forecast
values
0.179067765
0.211152379
0.215399676
0.218350002
0.220854004
0.22313157
0.225402246
0.227732845
0.230428835
0.234044378
0.256146292

Results & Interpretation

Statistics

Trials

Base Case

Mean

Median

Standard
Deviation

Forecast
Values

Interpretation

Monte Carlo Simulation assumed 100,000 input

1,00,000 points. The large sample size was used to decrease the
difference between repeated simulations.

22.30%

The Base case of the IRR value is 22.3% which means

that based on our assumptions given to financial model
the return from the project will be 22.3%.

22.28%

The mean value of the IRR value is 22.28% which

means that if investment is made on a number of similar
projects the average return from all the projects will be
22.28%.

22.31%

The median value of the IRR value is 22.31% which

means that 50% of the results from the simulation are
less than 22.31% and the remaining 50% of the results
from the simulation are greater than 22.31%.

0.90%

The Standard Deviation of 0.9% means that 68% of the

IRR value will lie between 22.3% +/- 0.9%. A low value
for the standard deviation means the possibility of
having IRR value close to the mean is higher.

Results & Interpretation

(2)
Statistics

Forecast
Values

Skewness

-0.2218

Kurtosis

3.08

Coeff. Of
Variability

0.0402

Minimum

17.91%

Maximum

25.61%

Range Width

7.71%

Interpretation

The distribution has a negative skew with a long tail in

the negative direction, which means that there is more
chance of getting lower numbers than mean value and
lesser chance of having IRR value greater than the mean
value.
A kurtosis value of 3.08 means that the distribution is
almost a normal distribution. However being slightly
greater than 3 means that there is comparatively more
data in the tail portion.
The Coefficient of Variability value of 0.0402 suggests
that all the variability in the IRR value cannot be
explained by just these 5 factors, which is true since
venue, time of revenue collection and other costs will be
needed to explain the full
variation.
Under the most pessimistic condition the IRR value will
be 17.91%.
Under the most optimistic condition the IRR value will be
25.61%.
The maximum variation in the IRR value is 7.71%, but
due to the small standard deviation most of the IRR
values will lie within a smaller range.

Limitations

Thank You