GM wants to determine whether to give a $1,000 incentive this year to buyers of Chevy Malibus. Here is relevant information for the base case:

■ Year 1 price: $20,000

■ Year 1 cost: $16,000

■ Each year 30 percent of the market buys a Malibu or a car from the competition.

■ Seventy percent of people who last bought a Malibu will make their next purchase a Malibu.

■ Twenty-five percent of people who last bought a car from the competitor will make their next purchase a Malibu.

■ Inflation is 5 percent per year (on costs and price).

■ Currently 50 percent of the market is loyal to Malibu, and 50 percent is loyal to the competition.

■ Profits are accrued at the beginning of the year and are discounted at 10 percent per year.

GM is considering giving a $1,000 incentive to any year 1 purchaser. The only change in the base numbers are as follows:

■ The percentage of the market buying a Malibu or a car from the competition in year 1 will increase by between 2 percent and 10 percent.

■ The fraction of loyal people who will make their next purchase in year 1 a Malibu will increase by between 5 percent and 15 percent.

■ The fraction of non-loyal people who will make their next purchase in year 1 a Malibu will increase by between 6 percent and 13 percent.

Answer the following questions:

a. Assuming end of year cash fl ows and a 30-year planning horizon, should Chevy give the $1,000 incentive? To answer this question, use the output from 10,000 iterations of a Monte Carlo simulation.

b. Suppose the discount rate decreased to 7 percent. Would your decision change? Explain your answer without any calculations.

c. Suppose the year 1 price increased to $22,000. Would your decision change? Explain your answer without any calculations.