Exam 11: Simulation Models

Exhibit 11-1 A company is considering investing $1.2M in a facility to manufacture a new product.The product will have a five year life,after which the facility will be shut down.A pro forma cash flow sheet for this project,with forecasted production levels,unit prices,and production costs,is shown below: -[Part 6] Refer to Exhibit 11-1.Given your answers to Parts 1 through 5,would you invest in this project?

Exhibit 11-1 A company is considering investing $1.2M in a facility to manufacture a new product.The product will have a five year life,after which the facility will be shut down.A pro forma cash flow sheet for this project,with forecasted production levels,unit prices,and production costs,is shown below: -[Part 2] Refer to Exhibit 11-1.Suppose that the forecasted price levels shown in the pro forma cash flow sheet are not deterministic,but rather are expected to fluctuate due to market forces.The prices are expected to be normally distributed in each year,with the following means and standard deviations: Using the appropriate @RISK functions in the pro forma,what is the expected NPV? Would you recommend investing in this project? Explain.

Exhibit 11-2 Suppose we want to choose capacity for a plant that will produce a new drug.In particular,we want to choose the capacity that maximizes discounted expected profit over the next 10 years.We have the following information: -[Part 1] Refer to Exhibit 11-2.Perform a simulation assuming the plant will be designed to meet the expected demand.What is the net present value (NPV)in that case?

A common distribution for modeling product lifetimes is the normal distribution

Exhibit 11-1 A company is considering investing $1.2M in a facility to manufacture a new product.The product will have a five year life,after which the facility will be shut down.A pro forma cash flow sheet for this project,with forecasted production levels,unit prices,and production costs,is shown below: -[Part 5] Refer to Exhibit 11-1.What are the chances the firm could loose money on this project,given the price uncertainty?

Which of the following @RISK functions can be used to find the probability of a particular value in an output distribution?

In marketing and sales models,the primary issue is the uncertain amount of sales that can be obtained,given an assumed timing.

The value at risk (VAR)is typically defined as the:

Suppose we compare the difference between the NPV of a financial model in which the means are entered for all input random variables and the NPV of a financial model in which the most likely values are entered for all input random variables.If we see a large difference between the NPV's,this illustrates:

RISKTARGET is a function that allows us to determine the cumulative probability of a particular value in an output distribution,such as the probability of meeting a due date in manufacturing.