Exam 11: Simulation Models

A marketing simulation model can be used to determine the expected profit under uncertain customer loyalty,but an optimization model must be used to determine the optimal amount to spend on increasing customer loyalty.

Which of the following @RISK functions can be used to find the probability of a particular value in an output 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 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. Year 1 2 3 4 5 Mean \ 27.40 \ 26.60 \ 25.50 \ 24.80 \ 23.50 Std. Dev. \ 5.50 \ 5.30 \ 5.00 \ 4.50 \ 4.10

In warranty cost models,the key input random variable is product lifetime.

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 1] Refer to Exhibit 11-1.What is the deterministic next present value (NPV)of the project,including the required investment,assuming a 10% discount rate

In cash flow models,we are typically interested in investigating:

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. Assume all cash flows occur at the end of the year. We have the following information: ∙Demand for the drug is expected to be normally distributed ˜ Normal (50,000, 12,000). Demand each year is an independent event. ∙A unit of capacity costs $16 to build in year 1. ∙The number of units produced will equal the demand, up to capacity limits. ∙The revenue per unit is $3.70 and the cost per unit is $0.20 (variable cost). ∙The maintenance cost per unit of capacity is $0.40 (fixed cost). ∙The discount rate is 10%. -[Part 3] Refer to Exhibit 11-2.Briefly explain why designing the plant for the expected capacity is clearly not the optimal solution.

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 lose money on this project,given the price uncertainty

A @RISK output range allows us to obtain a summary chart that shows the entire simulated range at once.