EXCEL CRYSTAL BALL QUESTION:

Not wanting to leave his beloved alma mater, Will Anderson has come up with a scheme to stay

around for 5 more years: He has decided to bid on the fast-food concession rights at the football

stadium. He feels sure that a bid of $60,000 will win the concession, which gives him the right to sell

food at football games for the next 5 years. He estimates that annual operating costs will be 40% of sales

and annual sales will average $100,000. His Uncle Josh has agreed to lend him the $60,000 to make the

bid. He will pay Josh $15,400 at the end of each year. His tax rate is 15%.

(a) Use a spreadsheet model to answer the following question. What is Will's average annual after-tax

profit? Assume that the yearly payments of $15,400 are tax deductible.

(b) Suppose that sales will probably vary plus or minus 40% from the average of $100,000 each year.

Will is concerned about the minimum after-tax profit he can earn in a year. He feels that he can survive

if it is at least $20,000. Model annual sales for the 5 years as five continuous uniform random variables.

Based on a sample of 7,500 five-year periods (750 periods if using Excel alone), estimate the probability

that over any five-year period the minimum after-tax profit for a year will be at least $20,000. Should

Will bid for the concession?