Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

K Manager is considering investing in a new $40,000 machine. Use of the new machine is expected to generate a cash flow of about

image text in transcribed

K Manager is considering investing in a new $40,000 machine. Use of the new machine is expected to generate a cash flow of about $9,000 per year for each of the next five years. However, the cash flo is uncertain, and the manager estimates that the actual cash flow will be normally distributed with a mean of $9,000 and a standard deviation of $400. The discount rate is set at 5% and assumed to remain constant over the next five years. The company evaluates capital investments using net present value. How risky is this investment? Develop and run a simulation model to answer this question using 50 trials Click the icon to view a sample of 50 simulation trial results. Say the values of the mean of the cash flow distribution, the standard deviation of the cash flow distribution, the initial investment, and the discount rate are entered in cells B3, B4, B5, and B6, respectively. Th for the Monte Carlo simulation, the cash flow for an individual year is randomly generated using the Excel formula =NORM.INV(RAND(), B3, B4). If the randomly-generated cash flows for the five years are cells B9, C9, D9, E9, and F9, then the Excel formula for the net present value is -B5+NPV(B6,B9 F 9). (Type whole numbers.) Determine the risk level of the investment using the provided sample of 50 simulation trial results. The probability of a nonpositive net present value is P(NPV 0) = This means the investment is (Round to two decimal places as needed.) Simulation Results - X -$89.65 -$1,579.93 -$174.45 $717.02 - $784.65 -$3,057.49 -$1,786.30 -$1,781.27 $1.180 61 - $2,604.18 -$901.40 - $2,344.31 -$685.61 - $1,899.89 -$1,205.22 -$3,069.45 -$1,195.65 $774 76 $68.69 - $913.51 -$1,552.81 -$1,966.66 - $1,827.60 -$1,261.51 -$131.44 -$695.02 $827.36 $253.69 - $954.05 - $714.76 - $942.82 -$818.66 - $413.88 - $960.97 - $1,228.96 $422 41 -$2,041.97 -$1,349.45 - $458.31 - $14.83 -$697.51 -$1,071.15 -$1,512.50 $264.67 1.700.00 not very risky (less than 25% chance of a negative NPV). somewhat risky (between 25% and 49% chance of a negative NPV). quite risky (between 50% and 75% chance of a negative NPV). very risky (greater than 75% chance of a negative NPV).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To Management Science

Authors: Bernard W. Taylor

12th Edition

1292092912, 9781292092911

More Books

Students also viewed these Mathematics questions

Question

Outline ways employers can create safer workplaces. (LO 3)

Answered: 1 week ago

Question

List sources of stress in the workplace. (LO 5)

Answered: 1 week ago

Question

Compare bullying in the workplace and employee violence. (LO 4)

Answered: 1 week ago