What is the first step in building a simulation model in Excel?

• A. Replace static values with cell formulas that generate random values
• B. Create a chart of inputs
• C. Enter all values as constants
• D. Run a quick forecast

Answer: (A)

In Monte Carlo-style modeling, the inputs must be able to vary according to chosen distributions to reveal risk and variability in the outputs. The first step is to replace static numbers with cell formulas that generate random values from the specified distributions. This sets up probabilistic inputs that drive the simulation across many iterations, producing a spread of possible outcomes rather than a single point.

For example, use formulas like =NORM.INV(RAND(), mean, stdev) to draw a normally distributed input, or =RANDBETWEEN(lower, upper) for a simple range. With these probabilistic inputs in place, you can run many simulation runs and build a distribution of outputs, which is the essence of the analysis.

If values stayed as constants, you’d get only one forecast and miss the risk and variability you want to study. Creating a chart of inputs or running a quick forecast can be helpful later, but they don’t enable the simulation to explore uncertainty from the start.