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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
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).
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