The Company A. would like to restart production and sale of a specific new product from Jan. next year. It makes the following assumptions about the project. The product's price is constant and equal to $750 per unit. The number of units sold per month follows a normal distribution with =1,500 and =700. 20-50 percent of the payments will come in the same month as the sale. The rest will come the next month. Material cost per unit in a given month will be $320 if sales are less than 800 units that month, $290 if the sales are between 800 and 1,200 units. $270 if the sales are between 1,200 and 1,600  units, $250 if the sales are between 1,600 and 2,000 units,

 

 and $235 if the sales are more than 2,000 units. Variable cost that comes in addition to material costs is 12 percent of the monthly sales. Fixed cost per month is $200,000 if the sales are less than 1,700 units. Otherwise, fixed cost per month is $250,000.  Wage cost is $300,000 per month. From May the wage cost will increase by 1,2,3,4,5,6 or 7 percent. The probabilities for these outcomes are defined by a binomial distribution with p=0.55. Taxes are paid with $75,000 in Jun. and $85,000 in December.  

 

Use simulation to address the following questions.

a. Simulate a yearly cash budget for Company A. 2000 times and calculated the

probability of a liquidity surplus after one year.

b. Assume that the Company A. required rate of return is 10 percent p.a. Calculate

the probability of accepting the project using an appropriate NPV analysis and

draw a probability distribution for the NPV based on your simulation.

c. Suppose that the product price is non constant and it is driven by the market

condition, where a low, median and high level of demand with their corresponding

probabilities of 20 percent, 30 percent and 50 percent. The product price given

these individual market condition probabilities is estimated as:

1,000*exp(-p)

Re-evaluate the probability of accepting the project using the expected price.