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Crystal Ball Taught for Valuing Properties
at Colorado School of Mines
CUSTOMER OF THE MONTH (AUG. 1999)
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For the past six years, Dr. Graham Davis has focused his research
and teaching efforts on resource economics problems. As an Associate
Professor in the Division of Economics and Business at the Colorado
School of Mines, Dr. Davis's priorities include teaching graduate
and undergraduate economics and business courses. Dr. Davis uses
Crystal Ball as an instructional tool in the classroom, specifically
in regard to valuing mineral and oil and gas properties.
For Dr. Davis and his students, Crystal Ball provides the potential
for a more accurate estimate of mine and well value. His students
learn that, due to nonlinear tax effects and options to vary production
levels, the valuations derived using Monte Carlo simulation technique
can be more realistic than those derived from the standard spreadsheet
analysis. A Crystal Ball analysis allows for the fact that certain
inputs to the cash flow analysis will vary over time, that these
variations may be correlated, and that they impact tax payments
and production levels in asymmetric ways.
In class, Dr. Davis shows students the difference between spreadsheet
valuations based on expected values of the cash flow parameters,
and those based on a Monte Carlo simulation. In addition to having
his students create their own Crystal Ball models, he discusses
which distributions are more appropriate for the various uncertain
parameters (e.g. capital costs, operating costs, production levels,
prices, and reserves). He emphasizes that these distributions must
make sense in the context of the valuation, and that a modeler may
need to truncate a distribution at lower and upper engineering or
financial bounds.
Aside from its utility, Crystal Ball fits easily into the classroom
and curriculum. "Crystal Ball is very user friendly and comes with
good documentation and a nice online tutorial," Dr. Davis noted.
"Students can learn to use the software after about 30 minutes of
playing around with it. I don't have to give any in-class instruction.
Students are very impressed by Crystal Ball's capabilities, such
as the ability to correlate variables and to produce custom distributions."
According to Dr. Davis, teaching Monte Carlo simulation gives his
students a competitive advantage in the job market. Learning about
simulation as a tool for property analysis makes the students aware
of both how to come up with expected cash flow numbers in NPV analysis
and the weaknesses inherent in standard spreadsheet analysis. This
awareness makes the students less confident and more wary of the
"number" they come up with in the standard spreadsheet NPV analysis.
Dr. Davis finds that Crystal Ball's correlation, percentile analysis,
and sensitivity analysis features are especially useful for valuing
mineral properties. He believes that for the purposes of mining
analysis, sensitivity analysis is an improvement on the standard
tornado analysis because it allows for several parameters to vary
at the same time. This coming semester, Dr. Davis will include CB
Pro and decision variables in his curriculum.
Recent papers by Dr. Davis:
Davis, G. "Using Commodity Price Projections in Mineral Project
Valuation." Mining Engineering 48.4 (1996): 67-70.
Davis, G. "(Mis)Use of Monte Carlo Simulations in NPV Analysis."
Mining Engineering 47.1 (1995): 75-79.
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