18. Orange Tech (OT) is a software company that provides a suite of programs that are essen- tial to everyday business computing. OT has just enhanced its software and released a new version of its programs. For financial planning purposes, OT needs to forecast its revenue over the next few years. To begin this analysis, OT is considering one of its largest cus- tomers. Over the planning horizon, assume that this customer will upgrade at most once to the newest software version, but the number of years that pass before the customer pur- chases an upgrade varies. Up to the year that the customer actually upgrades, assume there is a 0.50 probability that the customer upgrades in any particular year. In other words, the upgrade year of the customer is a random variable. For guidance on an appropriate way to model upgrade year, refer to Appendix 11.1. Furthermore, the revenue that OT earns from the customers upgrade also varies (depending on the number of programs the customer decides to upgrade). Assume that the revenue from an upgrade obeys a normal distribution with a mean of $100,000 and a standard deviation of $25,000. Using the template in the file OrangeTech, complete a simulation model that analyzes the net present value of the revenue from the customer upgrade. Use an annual discount rate of 10%.

a. What is the average net present value that OT earns from this customer? (Hint: Excels NPV function computes the net present value for a sequence of cash flows that occur at the end of each period. To correctly use this function for cash flows that occur at the beginning of each period, use the formula 5NPV(discount rate, flow range) 1 initial amount, where discount rate is the annual discount rate, flow range is the cell range containing cash flows for years 1 through n, and initial amount is the cash flow in the initial period (year 0)).

b. What is the standard deviation of net present value? How does this compare to the standard deviation of the revenue? Explain.