Carl, an engineering colleague, estimated net cash flow after taxes (CFAT) for the project he is working
Question:
Carl, an engineering colleague, estimated net cash flow after taxes (CFAT) for the project he is working on. The additional CFAT of $2800 in year 10 is the salvage value of capital assets.
Year CFAT, $
0 ............... _28,800
1–6 ............ 5,400
7–10 .......... 2,040
10 .............. 2,800
The PW value at the current MARR of 7% per year is
PW = –28,800 + 5400(P/A, 7%, 6)
+ 2040(P/A, 7%, 4) (P/F, 7%, 6)
+ 2800(P/F, 7%, 10)
= $2966
Carl believes the MARR will vary over a relatively narrow range, as will the CFAT, especially during the out years of 7 through 10. He is willing to accept the other estimates as certain. Use the following probability distribution assumptions for MARR and CFAT to perform a simulation—hand- or spreadsheet-based.
MARR. Uniform distribution over the range 6% to 10%.
CFAT, years 7 through 10. Uniform distribution over the range $1600 to $2400 for each year.
Plot the resulting PW distribution. Should the plan be accepted using decision making under certainty? Under risk?
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Step by Step Answer:
Using a spreadsheet the steps in Sec 195 are applied 1 CFAT given for years 0 through 6 2 i varies between 6 and 10 CFAT for years 710 varies between ...View the full answer
