Deck 16: Simulation Models

Question 1

A key objective in cash flow models is often to determine the amount of debt that must be taken out to maintain a minimum cash balance.

Answer 1

True

Question 2

The random nature of games of chance make them poor candidates for simulation.

Answer 2

False

Question 3

Although we can determine the optimal bid and the expected profit from that bid in a bidding simulation,we usually cannot determine the probability of winning.

Answer 3

False

Question 4

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

Question 5

In a bidding model,once we have a bidding strategy that maximizes the expected profit,we should no longer consider the bidder's aversion to risk.

Question 6

A tornado graph lets us see which random input has the greatest effect on a specified output in a financial model.

Question 7

A common distribution for modeling product lifetimes is the binomial distribution.

Question 8

In a manufacturing setting,a discrete distribution is natural for modeling the number of days to produce a batch,and a continuous distribution is appropriate for modeling the yield from a batch.

Question 9

In investment models,we typically must simulate the random investment weights.

Question 10

In bidding models,the simulation input variable is the number of competitors who will bid.

Question 11

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.

Question 12

Uncertain timing and the events that follow in process modeling can be modeled using IF statements.

Question 13

Churn is an example of the type of uncertain variable we deal with in financial models.

Question 14

In financial simulation models,we are typically more interested in the expected NPV of a project than in the extremes of the outcomes.

Question 15

The primary objective in simulation models of bidding for contracts is to determine the optimal bid.

Question 16

In financial simulation models,the value at risk (VAR)is the 5^th percentile of an output distribution,and it indicates nearly the worst possible outcome.

Question 17

RISKMAX and RISKMIN are can be used to find the probability of meeting a given due date in a manufacturing model.

Question 18

Using @RISK summary functions such as RISKMEAN,RISKPERCENTILE,and others allows us to capture simulation results in the same worksheet as the simulation model.

Question 19

We can use the RISKSIMTABLE function to summarize the results of a single simulation of product lifetime.

Question 20

In marketing models of customer loyalty,we are typically interested in modeling the rate of customer retention,called churn.

Question 21

Customer loyalty models are an example of which category of simulation application?

A)Operations models
B)Financial models
C)Marketing models
D)Games of chance

Question 22

Which function is not an @RISK statistical function?

A)RISKMIN
B)RISKMAX
C)RISKPERCENTILE
D)RISKSIMTABLE

Question 23

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

Question 24

In marketing and sales models,the primary source of uncertainty is the timing of sales.

Question 25

The @RISK function RISKUNIFORM (0,1)is essentially equivalent to RAND().

Question 26

Which of the following functions is not appropriate in cases where a single simulation is run?

A)RISKMIN
B)RISKMAX
C)RISKPERCENTILE
D)RISKSIMTABLE

Question 27

Financial analysts may attempt to determine which of the following with simulation models?

A)Mean and variance of a project NPV
B)Probability that a project with have a negative NPV
C)Probability that a company will have to borrow a certain amount during the next year
D)All of these choices

Question 28

Bidding for contracts is an example of which category of simulation model application?

A)Operations models
B)Financial models
C)Marketing models
D)Games of chance

Question 29

Suppose we are using a marketing simulation model to determine the expected profit under conditions of uncertain customer loyalty.In this case,we should use an optimization model to determine the optimal amount to spend on increasing customer loyalty.

Question 30

Suppose we have a 0-1 output for whether a bidder wins a contract in a bidding model (0=bidder does not win contract,and 1=bidder wins contract).From the mean of this output,what can we determine?

A)The mean number of bidders
B)The average winning bid
C)The probability that the bidder will win the contract
D)The standard deviation of the next highest competitor's bid

Question 31

Which of the following is an appropriate distribution,especially when a right-skewed distribution of a nonnegative quantity is desired?

A)T-distribution
B)Binomial distribution
C)Gamma distribution
D)Normal distribution

Question 32

Which two random variables are typically simulated as inputs in bidding models?

A)Number of bidding competitors and bid amount
B)Number of bidding competitors and bid profit
C)Individual bid amounts and net bidding profits
D)Mean number of bidding competitors and net bidding profit

Question 33

Cash balance models are an example of which category of simulation application?

A)Operations models
B)Financial models
C)Marketing models
D)Games of chance

Question 34

Financial analysts often investigate the value at risk (VAR)with simulation models.VAR is an indicator of _____ for a project.

A)how much to bid
B)the expected amount of loss
C)what is nearly the worst possible outcome
D)the required amount of investment required

Question 35

What is an example of a financial application in which simulation cannot be applied?

A)Future stock prices
B)Customer preferences for different attributes of products
C)Future interest rates
D)Future cash flows

Question 36

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

A)RISKMIN
B)RISKMAX
C)RISKPERCENTILE
D)RISKTARGET

Question 37

You would like to develop a simulation model for estimating the time until failure of a product.Which distribution is most appropriate for your model?

A)Binomial
B)Gamma
C)Normal
D)Chi-square

Question 38

Which of the following is typically not an application of simulation models?

A)Operations models
B)Financial models
C)Marketing models
D)Value of information models

Question 39

Which function is often required in simulations where we must model a process over multiple time periods and take the uncertain timing of events into account?

A)RISKMIN
B)RISKMAX
C)NPV
D)IF

Question 40

In a manufacturing model,we might simulate the number of days to produce a batch and the yield from each batch.The number of days would typically be a ____ distribution and the yield would be a ____ distribution.

A)continuous; discrete
B)continuous; continuous
C)discrete; continuous
D)discrete; discrete

Question 41

Estimate the mean and standard deviation of the NPV of this project.Assume that cash flows are discounted at a rate of 10% per year.

Question 42

After a year,what will the market share for each of the three companies be? Assume = 0.10, = 0.15,and = 0.20.(Hint: Use the RISKBINOMIAL function to model how many people switch from A,then how many switch from A to B and from A to C.)

Question 43

Estimate the mean and standard deviation of the NPV of this project.Assume that cash flows are discounted at a rate of 10% per year.Now assume that the project has an abandonment option.At the end of each year you can abandon the project for the values given below: For example,suppose that year 1 cash flow is $400.Then,at the end of year 1,you expect cash flow for each remaining year to be $400.This has an NPV of less than $6200,so you should abandon the project and collect $6200 at the end of year 1.Estimate the mean and standard deviation of the project with the abandonment option.How much would you pay for the abandonment option? (Hint: You can abandon a project at most once.Thus,in year 5,for example,you abandon only if the sum of future expected NPVs is less than the year 5 abandonment value and the project has not yet been abandoned.Also,once you abandon the project,the actual cash flows for future years will 0.So,the future cash flows after abandonment should disappear.)

Question 44

In investment models,a useful approach for generating future returns and inflation factors from historical data is the _____ approach.

A)NPV
B)scenario
C)averaging
D)trend analysis

Question 45

Consider a device that requires two batteries to function.If either of these batteries dies,the device will not work.Currently there are two brand new batteries in the device,and there are three extra brand-new batteries.Each battery,once it is placed in the device,lasts a random amount of time that is triangularly distributed with parameters 15,18,and 25 (all expressed in hours).When any of the batteries in the device dies,it is immediately replaced by an extra (if an extra is still available).Use @RISK to simulate the time the device can last with the batteries currently available.

Question 46

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.A large difference between the NPV's demonstrate the

A)value at risk (VAR).
B)effect of randomness.
C)flaw of averages.
D)bias of the analyst.

Question 47

The amount of variability of a financial output caused by different inputs can be investigated using

A)the NPV function.
B)a histogram of the NPV.
C)a tornado graph of NPV.
D)the value at risk (VAR).

Question 48

If the warranty period were reduced to 2 years,how much per year in replacement costs would be saved?

Question 49

Assume = 0.10, = 0.15,and = 0.20.Suppose a 1% increase in market share is worth $10,000 per week to company A.Company A believes that for a cost of $1 million per year it can cut the percentage of unsatisfactory juice cartons in half.Is this worthwhile?

Question 50

Consider a customer whose first car is GM.If profits are discounted at 10% annually,use simulation to estimate the value of this customer to GM over the customer's lifetime.

Question 51

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

A)value at risk (VAR).
B)net present value (NPV).
C)amount of loans required to maintain a minimum cash balance.
D)interest on loans taken out by a firm.

Question 52

In a marketing and sales model,what might be a good choice for a discrete distribution to model the random timing of sales?

A)Logarithmic distribution
B)Normal distribution
C)Binomial distribution
D)Poisson distribution

Question 53

The main topic of investigation in marketing and sales models is the

A)amount invested in marketing.
B)timing of marketing.
C)profit from sales.
D)timing of sales.

Question 54

A key input variable in many marketing models of customer loyalty is the

A)mean profit per customer.
B)number of customers.
C)churn rate.
D)time horizon.

Question 55

Simulate Amanda's portfolio over the next 30 years and determine how much she can expect to have in her account at the end of that period.At the beginning of each year,compute the beginning balance in Amanda's account.Note that this balance is either 0 (for year 1)or equal to the ending balance of the previous year.The contribution of $5,000 is then added to calculate the new balance.The market return for each year is given by a normal random variable with the parameters above (assume the market returns in each year are independent of the other years).The ending balance for each year is then equal to the beginning balance,augmented by the contribution,and multiplied by (1+Market return).Suppose Amanda will stop investing in the stock market and transfer all of her retirement into a savings account if and when she reaches $500,000.When can she expect to reach this goal?

Question 56

What is the probability that your portfolio's annual return will exceed 20%?

Question 57

Which tasks are considered to be marketing applications of simulation modeling?

A)Determining the effect of entry of new brands into the market
B)Discovering customer preferences for different attributes of products
C)Investigating brand-switching behavior of customers
D)All of these choices

Question 58

Simulate Amanda's portfolio over the next 30 years and determine how much she can expect to have in her account at the end of that period.At the beginning of each year,compute the beginning balance in Amanda's account.Note that this balance is either 0 (for year 1)or equal to the ending balance of the previous year.The contribution of $5,000 is then added to calculate the new balance.The market return for each year is given by a normal random variable with the parameters above (assume the market returns in each year are independent of the other years).The ending balance for each year is then equal to the beginning balance,augmented by the contribution,and multiplied by (1+Market return).
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Next,suppose Amanda's broker thinks the stock market may be too risky and has advised her to diversity by investing some of her money in money market funds and bonds.He estimates that this will lower her expected annual return to 10% per year,but will also lower the standard deviation to 10%.Suppose again that Amanda will stop investing in the stock market and transfer all of her retirement into a savings account if and when she reaches $500,000.When can she expect to reach this goal under the more conservative investing strategy?

Question 59

The value at risk (VAR)is typically defined as the _____ percentile of NPV distribution .

A)5^th
B)10^th
C)50^th
D)90^th