Deck 16: Simulation Models

Question 1

A common distribution for modeling product lifetimes is the binomial distribution

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

The @RISK function RISKDUNIFORM in the form = RISKDUNIFORM ({List})generates a random member of a given list,so that each member of the list has the same chance of being chosen.

Question 5

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 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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.

Question 20

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

Question 21

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 we can tell:

A) the number of times the bidder wins the contract
B) the number of times the bidder does not win the contract
C) the probability that the bidder will win the contract
D) the probability that the bidder will not win the contract
E) None of these options

Question 22

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.

Question 23

Simulation applications involving games of chance are primarily for learning the background of simulation (e.g. ,modeling gambling casinos of Monte Carlo),since they are not business applications per se.

Question 24

In a warranty cost modeling model,which of the following is a key input random variable?

A) Warranty cost
B) Warranty time limitation
C) Lifetime of product
D) Replacement cost of product
E) All of these options

Question 25

Which of the following functions is not an @RISK statistical function?

A) RISKMIN
B) RISKMAX
C) RISKPERCENTILE
D) RISKSIMTABLE
E) None of these options

Question 26

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

A) 5^th percentile of NPV distribution
B) 10^th percentile of NPV distribution
C) 50^th percentile of NPV distribution
D) 90^th percentile of NPV distribution
E) 95^th percentile of NPV distribution

Question 27

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

Question 28

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

A) the NPV approach
B) the scenario approach
C) the averaging approach
D) the trend analysis approach
E) None of these options

Question 29

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:

A) the value at risk (VAR)
B) the effect of randomness
C) the flaw of averages
D) the bias of the analyst
E) None of these options

Question 30

Which of the following is among the questions that financial analysts try to answer 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) Mean and variance of a company's profit during the next fiscal year
E) All of these options

Question 31

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
E) All of these options

Question 32

The main issue in marketing and sales models is:

A) the amount invested in marketing
B) the timing of marketing
C) the profit from sales
D) the timing of sales
E) the tradeoff between marketing and sales

Question 33

Financial analysts often investigate the value at risk (VAR)with simulation models.VAR is an indicator of:

A) how much to bid for a project
B) the expected amount of loss for a project
C) what is nearly the worst possible outcome for a project
D) the required amount of investment required for a project
E) None of these options

Question 34

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

A) RISKMIN
B) RISKMAX
C) RISKPERCENTILE
D) RISKTARGET
E) None of these options

Question 35

Which of the following distributions is most likely to be used to develop a simulation model for estimating the time until failure of a product in a simulation model?

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

Question 36

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 37

Which of the following functions is often required in simulations where we must model a process over multiple time periods and must deal with uncertain timing of events?

A) RISKMIN
B) RISKMAX
C) NPV
D) IF
E) None of these options

Question 38

We can use Excel's RAND function inside an IF function to simulate whether some event occurs or does not occur.

Question 39

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
E) None of these options

Question 40

The two random variables we typically simulate as inputs in bidding models are?

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
E) None of these options

Question 41

What is the standard deviation of the ending balance? What does the distribution look like now? What should Amanda infer from this?

Question 42

Which of the following are not among the marketing applications of simulation?

A) The entry of new brands into the market
B) Customer preferences for different attributes of products
C) Brand-switching behavior of customers
D) The effect of advertising on sales
E) None of these options

Question 43

Cash balance models are an example of which of the following types of simulation application?

A) Operations models
B) Financial models
C) Marketing models
D) Games of chance
E) None of these options

Question 44

Given your answers to Questions 51 through 55,would you invest in this project?
Suppose that GM earns a $4000 profit each time a person buys a car.We want to determine how the expected profit earned from a customer depends on the quality of GM's cars.The customer is assumed to buy a new car every five years,for a total of 10 cars through her lifetime.The customer will keep buying GM cars so long as they are satisfied with them.The probability that the customer will be satisfied with her GM car is 80%.If she is not satisfied with her GM car,she will buy another brand (we'll call all other brands cumulatively "Toyota").The probability that she is satisfied with "Toyota" is 85%.

Question 45

Considering your answers for Questions 78 through 83,please state how many units of capacity you think the plant should be built for and explain why.
An executive has been offered a compensation package that includes stock options.The current stock price is $30/share,and she has been offered a call option on 2000 shares,which can be exercised five years from now at a price of $42/share.Therefore,if the market price of the shares in five years is more than $42/share,she can buy 2000 shares at $42/share,and then immediately sell the shares at the market price,earning a riskless profit.If the market price of the shares was less than $42/share,she will obviously choose not to exercise the option,and would have zero profit.
Assume the price of the stock can be modeled as exponential growth (compounding),which could be calculated as:
where,
stock price in next period (i.e. ,price next year)
current stock price
annual growth rate of the stock price,which has been 10%
annual volatility,which is estimated to be 18%
normal random variable with mean of zero and standard deviation of 1

Question 46

Develop an @Risk model to estimate the NPV given an assumed capacity.What are the variable inputs and outputs?

Question 47

Customer loyalty models are an example of which of the following types of simulation application?

A) Operations models
B) Financial models
C) Marketing models
D) Games of chance
E) None of these options

Question 48

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

A) the value at risk (VAR)
B) the net present value (NPV)
C) the amount of loans required to maintain a minimum cash balance
D) the interest on loans taken out by a firm
E) None of these options

Question 49

Bidding for contracts is an example of which of the following types of simulation model application?

A) Operations models
B) Financial models
C) Marketing models
D) Games of chance
E) None of these options

Question 50

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 chart of NPV
D) the value at risk (VAR)
E) All of these options

Question 51

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

A) RISKMIN
B) RISKMAX
C) RISKPERCENTILE
D) RISKSIMTABLE
E) None of these options

Question 52

Which of the following is not among the financial applications where simulation can be applied?

A) Future stock prices
B) Customer preferences for different attributes of products
C) Future interest rates
D) Future cash flows
E) None of these options

Question 53

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
Amanda is a recent college graduate,and has just started her first job.She would like to know if she saves $5,000 per year out of her salary over the next 30 years what the distribution of the value of her retirement fund after 30 years.She has decided that she will invest all her money in the stock market that she estimates has a return that is normally distributed with mean 12% per year and standard deviation 25%.

Question 54

Does the answer to Question 72 match your intuition? Explain why or why not.
In this example we are estimating the net present value of introducing a new drug to market.We have the following information about the market:
· The market size is 1,000,000 and is projected to grow at an average 5%,with a standard deviation of 1%,over the next ten years.
· The market share captured at entry is projected to be between 20% and 70%,with most likely value 40%.
· Three competitors may enter the market in the future,with each one having a 40% probability of entry per year.
· For each new competitor per year,the market share goes down by 20%.
· The marginal profit per unit is $1.80.
· We want to evaluate the project over ten years,using a discount rate of 10%.

Question 55

Which simulation yields the largest median NPV?
In this example we are estimating the net present value of introducing a new drug to market.We have the following information about the market:
· The market size is 1,000,000 and is projected to grow at an average 5%,with a standard deviation of 1%,over the next ten years.
· The market share captured at entry is projected to be between 20% and 70%,with most likely value 40%.
· Three competitors may enter the market in the future,with each one having a 40% probability of entry per year.
· For each new competitor per year,the market share goes down by 20%.
· The marginal profit per unit is $1.80.
· We want to evaluate the project over ten years,using a discount rate of 10%.

Question 56

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

A) RAND()
B) Normal distribution
C) Binomial distribution
D) Exponential distribution
E) Poisson distribution