K A plant manager is considering investing in a new 40 000
Last updated: 4/23/2023
K A plant manager is considering investing in a new 40 000 machine Use of the new machine is expected to generate a cash flow of about 9 000 per year for each of the next five years However the cash flo is uncertain and the manager estimates that the actual cash flow will be normally distributed with a mean of 9 000 and a standard deviation of 400 The discount rate is set at 5 and assumed to remain constant over the next five years The company evaluates capital investments using net present value How risky is this investment Develop and run a simulation model to answer this question using 50 trials Click the icon to view a sample of 50 simulation trial results 89 65 1 579 93 174 45 717 02 784 65 3 057 49 1 786 30 1 781 27 1 180 61 Say the values of the mean of the cash flow distribution the standard deviation of the cash flow distribution the initial investment and the discount rate are entered in cells B3 B4 B5 and B6 respectively The for the Monte Carlo simulation the cash flow for an individual year is randomly generated using the Excel formula NORM INV RAND B3 B4 If the randomly generated cash flows for the five years are i cells B9 C9 D9 E9 and F9 then the Excel formula for the net present value is B 5 NPV B6 B9 F 9 Type whole numbers Determine the risk level of the investment using the provided sample of 50 simulation trial results The probability of a nonpositive net present value is P NPV 0 This means the investment is Round to two decimal places as needed Simulation Results 2 604 18 901 40 2 344 31 685 61 1 899 89 1 205 22 3 069 45 1 195 65 774 76 68 69 913 51 1 552 81 1 966 66 1 827 60 1 261 51 131 44 695 02 827 36 253 69 954 05 714 76 942 82 818 66 413 88 960 97 1 228 96 133 11 2 041 97 1 349 45 458 31 14 83 697 51 1 071 15 1 512 50 264 67 1 708 99 XX X not very risky less than 25 chance of a negative NPV somewhat risky between 25 and 49 chance of a negative NPV quite risky between 50 and 75 chance of a negative NPV very risky greater than 75 chance of a negative NPV