A company is trying to determine the proper capacity level for its new electric car. A unit of capacity provides the potential to produce one car per year. It costs $15,000 to build a unit of capacity and the cost is charged equally over the next five years. It also costs $500 per year to maintain a unit of capacity (whether or not it is used). Each car sells for $20,000 and incurs a variable production cost of $15,000. The annual demand for the electric car during each of the next five years is believed to be normally distributed with mean 65,000 and standard deviation 12,000. The demands during different years are assumed to be independent. Profits are discounted at a 7.5% annual interest rate. The company is working with a five-year planning horizon. Capacity levels of 30,000, 40,000, 50,000, 60,000, and 70,000 are under consideration. You can assume that the company never produces more than demand, so there is never any inventory to carry over from year to year.

a. Assuming that the company is risk neutral, that is, it is willing to base its decision on mean NPV, use simulation to find the optimal capacity level. Select3,0004,0005,0006,0007,000Item 1

b. Using the answer to part a, there is a 5% chance that the actual discounted profit will exceed what value, and there is a 5% chance that the actual discounted profit will be less than what value? Enter your answers in millions of dollars. If needed, round your answers to one decimal digit.

5th percentile:	$ M
95th percentile:	$ M

c. If the company is risk averse, how might the optimal capacity level change?

Because the simulation indicates that the variance SelectincreasesdecreasesItem 4 with larger capacity levels, a risk averse company will likely SelectincreasedecreaseItem 5 the capacity level.