Question
A company is considering a franchise expansion project. It plans to estimate the project's net present value (NPV) to decide whether or not it should
A company is considering a franchise expansion project. It plans to estimate the project's net present value (NPV) to decide whether or not it should expand.
Below are 3 cases for the 6 different variables that affect the project's NPV:
You are given:
The project has a finite time horizon and no shutdown costs. When the project expires, all cash flows cease.
All six variables are mutually independent.
The probability that the worst case occurs is 25%, the probability that the base case occurs is 50%, and the probability that the best case occurs is 25%. Also, assume these probabilities are the same across all 6 input variables.
Use the following 6 uniform random numbers u between 0 and 1 to simulate a value for
each of the 6 variables (in order from the 1st row of the table down to the 6th row):
0.0277 0.1198 0.1724 0.4757 0.9617 0.1600
If, pull from the worst-case column. 0u<0.25
If, pull from the base-case column. 0.25u<0.75
If, pull from the best-case column. u<0.751
Based on the simulated values, calculate the NPV for the project.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started