An investment of $1.5 million is made at time zero with annual revenues of $500,00020% in year 1, growing at the rate of 30% annually over a seven-year horizon. Annual O&M costs are estimated at $150,000 per year. The salvage value of the investment is $1 million 20% at the end of year N, where N = 5, 6, 7, 8, or 9 years with probability 0.1, 0.1, 0.6, 0.05, 0.15 respectively. If the MARR is known to be either 15% 20%, 25%, 30% and 35% with probability 0.15, 0.05, 0.50, 0.15, 0.15 respectively.

a. Perform the following two-parameter sensitivity analyses:

Sensitivity of salvage value and horizon

Sensitivity of salvage value and interest rate

Sensitivity of annual revenues and horizon.

b. Given the information obtained from your dual-parameter sensitivity analyses, construct pessimistic, average, and optimistic scenarios for the investment. What is the equivalent annual worth of each scenario? What do you think about the riskiness of this project?

c. Compute the expected equivalent annual worth and its variance and discuss the risk-return trade-off of this project. (Hint: Assume a beta distribution for the first year annual revenue. Also round E(N) to the nearest integer.)