Question
Solar Manufacturer and Distributor, CFO of Solar Manufacturer and Distributor Enterprises, is analyzing a new project to sell solar powered batteries for cell phones. Solar
Solar Manufacturer and Distributor, CFO of Solar Manufacturer and Distributor Enterprises, is analyzing a new project to sell solar powered batteries for cell phones. Solar Manufacturer and Distributor has estimated the following probability distributions for the variables in the project:
Probability: | 15% | 40% | 35% | ? | ||
Industry demand: | 90,000,000 | 108,000,000 | 124,000,000 | 84,000,000 | ||
Probability: | 20% | 25% | 15% | 10% | 10% | ? |
Solar Manufacturer and Distributor market share: | 1% | 2% | 3% | 4% | 5% | 6% |
Probability: | 20% | 45% | 25% | ? | ||
Initial cost: | $62,000,000 | $72,000,000 | $75,000,000 | $60,000,000 | ||
Probability: | 20% | 35% | 25% | ? | ||
VC per unit | $30 | $28 | $26 | $24 | ||
Probability: | 30% | 35% | 25% | ? | ||
Fixed costs: | $22,000,000 | $28,000,000 | $32,000,000 | $24,000,000 |
The unit price depends on the industry demand since a greater demand will result in a higher price. Solar Manufacturer and Distributor determines that the price per unit will be given by the following equation
Price = Industry demand / 2,000,000 + $1(+/-$2.25)
The random "+/-$2.25" term represents a increase or decrease in price according to the following distribution:
Probability: | 0.45 | ? |
Price randomness: | -2.25 | 2.25 |
The length of the project, tax rate, and required return are:
Project length (years): | 6 |
Depreciation | Straight Line Method with Zero scrap value |
Tax rate: | 0.28 |
Required return: | 0.1 |
create a graph of the distribution of the IRRs from the Monte Carlo simulation for different ranges of IRR
What is the probability of positive NPV? What is the probability of favorable IRR?
Based on the above results, do you accept or reject the project and why?
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