A Biotech company is in the process of developing a new fertilizer. The company wants to use Monte Carlo Simulation to see if it is a profitable investment. You have been invited to model and execute this simulation analysis for them. The planning horizon is ten years with the following assumptions:

Based on the current competition in the market and analysis of similar brands, they believe that they can sell their product for a fixed price of $5/lb in the next ten years.

Demand in the first year is expected to be any integer number between 50,000 and 80,000 lbs (with a uniform distribution). Each year, total demand is expected to change by either -10, 0, 10 or 15 percent with respective probabilities of 0.2, 0.3, 0.4, and 0.1.

Product development costs are about $1M and are incurred once in the beginning of the planning horizon.

Annual fixed cost includes overhead and is random that follows a normal distribution with the mean of 50,000 and a standard deviation of 10,000 (find a random number for each year).

Variable cost is estimated to be either $1, $1.5, or $2 per lb with probabilities of 0.2, 0.5, and 0.3 (find a random number for variable cost at each year).

If for a year, profit contribution (selling price variable cost per unit) becomes $4 or more, there is 50% chance that competitors introduce a substitute product. If a substitute product enters the market, it will stay in the market until the end of the tenth year! If that happens, we get only half of the total demand that was originally predicted.

Assume interest rate is 10%.

Based on an expected value of NPV computed using Monte Carlo simulation for a planning horizon of 10 years, do you consider this a profitable project? How much is the NPV of this project?

Hint: For each year, {Profit = price * demand annual fixed costs variable costs * demand}.

Reminder: {Present Value = Future Value / (1+interest rate) ^n} NPV = Sum of present values of cash flows in each year.

If you have never worked with NPV, please Google it and make yourself familiar with it or ask me to explain it in class.