A plant manager is considering investing in a new $35,000 machine. Use of the new machine is expected to generate a cash flow of about $8,000 per year for each of the next five years. However, the cash flow is uncertain, and the manager estimates that the actual cash flow will be normally distributed with a mean of $8,000 and a standard deviation of $500. The discount rate is set at 5% and assumed to remain constant over the next five years. The company evaluates capital investments using NPV. How risky is this investment, i.e., what is the probability of having NPV less than 0? Develop and run a simulation model to answer this question using 100 trials and generate a frequency distribution of simulated NPVs. See the worksheet in the New Machine Investment file.

New Machine Investment 3 Mean Standard Deviation 5 Initial Investment 6 Discount Rate $8,000.00 $500.00 $35,000.00 5% 8 Years 9 Cash Flow 11 NPV 14 Minimum 15 Maximum 16 Average 17 Standard Deviation Cumulative Frequency Frequency Bin $4,000 $3,000 $2,000 $1,000 $0 $1,000 $2,000 $3,000 New Machine Investment 3 Mean Standard Deviation 5 Initial Investment 6 Discount Rate $8,000.00 $500.00 $35,000.00 5% 8 Years 9 Cash Flow 11 NPV 14 Minimum 15 Maximum 16 Average 17 Standard Deviation Cumulative Frequency Frequency Bin $4,000 $3,000 $2,000 $1,000 $0 $1,000 $2,000 $3,000