(4) (This exercise is really designed to be carried out by a group of people, with each individual using a different set of random numbers. The individual results can then be combined by using the table at the end of the question.)

An equipment hire company has to decide whether to buy a specialized piece of earth-digging machinery for $6000. The machine would be sold after two years. The main factors which it is thought will affect the return on the investment are:

(i) The revenue generated by hiring the machine out for a day; it is certain that this will be $40.
(ii) The number of days that the machine will be hired out in year 1 and in year 2.
(iii) The costs of having the machine available for hire (e.g., maintenance and repair costs) in year 1 and year 2.
(iv) The price which will be obtained for the machine when it is sold at the end of year 2.
For each factor the following probability distributions have been estimated:

Carry out one simulation of a possible combination of circumstances and calculate the NPV for your simulation. Use a discount rate of 10%.
The results for the entire group can then be entered into the following table:

Therefore, the most likely range for the NPV appears to be … … and the probability of a negative NPV appears to be … …

Transcribed Image Text:

No. of days hired out in year 1 Prob. (%) under 100 30 100 to under 200 200 to under 300 50 20 Annual costs ($) Prob. in year 1 (%) No. of days hired out in year 2 (This is assumed to have the same distribution as year 1) Prob. in year 2 (%) 1000 to under 2000 50 2000 to under 3000 30 3000 to under 4000 20 880 30 40 30 Selling price ($) Prob. (%) 1000 to under 2000 40 2000 to under 3000 60