SimulationOgden Corporation has compiled the following information on a capital expenditure proposal:

(1) The projected cash inflows are normally distributed with a mean of $39,000 and a standard deviation of $7,000.

(2) The projected cash outflows are normally distributed with a mean of $31,000 and a standard deviation of $4,000.

(3) The firm has an 11.8%

cost of capital (4) The probability distributions of cash inflows and cash outflows are not expected to change over the project's 10-year

life.

a. Describe how the foregoing data can be used to develop a simulation model for finding the net present value of the project. (Select all the choices that apply.)

A. Ogden Corporation could use a computer simulation to generate the respective profitability distributions through the generation of random numbers.

B. By tying various cash flow assumptions together into a mathematical model and repeating the process numerous times, a probability distribution of project returns can be developed. The process of generating random numbers and using the probability distributions for cash inflows and outflows allows values for each of the variables to be determined.

C.The use of the computer also allows for more sophisticated simulation using components of cash inflows and outflows. Substitution of these values into the mathematical model yields the NPV. The key lies in formulating a mathematical model that truly reflects existing relationships.

D.The main advantage of using a computer simulation is that you can guarantee that you will always get answers that represent the future outcomes.

Click to select your answer(s) and then click Check Answer.

b. Discuss the advantages of using a simulation to evaluate the proposed project.