Main Electric is deciding whether to invest \(\$ 19,700,000\) in a new plant. An analyst forecasts that the plant will generate the independent random cash flows shown in the table below at the end of each year. MARR is 15 percent/year.

For the following questions, determine an analytical solution:

a. Determine the mean and standard deviation of the present worth.

b. If the present worth is normally distributed, what is the probability that present worth is greater than 0 ? For the following questions, determine a simulation solution using @RISK:
Assume each end-of-year cash flow is normally distributed with the mean and standard deviation shown in the table above.

c. Using a Latin hypercube simulation with 10,000 iterations, estimate the mean and standard deviation of present worth and the probability of positive present worth.

d. Using a Monte Carlo simulation with 10,000 iterations, estimate the mean and standard deviation of present worth and the probability of positive present worth.

Transcribed Image Text:

Standard Deviation of Net Cash Flow End of Year Expected Net Cash Flow 0 -$19,700,000 $0 1 $1,200,000 $120,000 2 $3,600,000 $240,000 3 $6,000,000 $650,000 4 $9,600,000 $750,000 5 $11,000,000 $1,080,000