The Bertz Merchandising Company uses a simulation approach to judge investment projects. Three factors are employed: market demand, in units; price per unit minus cost per unit (on an after-tax basis); and investment required at time 0. These factors are felt to be independent of one another. In analyzing a new "fad" consumer product with a one-year product life, Bertz estimates the following probability distributions:

a. Using a table of random numbers or some other random process, simulate 20 or more trials of these three factors, and compute the internal rate of return on this one-year investment for each trial.
b. Approximately, what is the most likely return? How risky is the project?

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PRICE MINUS COST PER UNIT (AFTER-TAX) MARKET DEMAND INVESTMENT REQUIRED PROBABILITY UNITS PROBABILITY DOLLARS PROBABILITY DOLLARS $160,000 165,000 170,000 0.15 0.20 0.30 0.20 0.15 1.00 26,000 27,000 28,000 29,000 30,000 0.30 0.40 0.30 1.00 $6.00 6.50 7.00 0.30 0.40 0.30 1.00